Industry Transformation Towards Service Logic

Industry Transformation Towards Service Logic: A Business Model Approach

December working paper from
Cambridge Service Alliance -
'Industry Transformation Towards
Service Logic: A Business
Model Appraoch, by Anna Viljakainen,
Marja Toivonen and Maiju Aikala

The issue of how customer value is turned into profitable business is becoming increasingly important when companies adopt new service-based business models. When moving the focus from making goods or services to assisting customers in their value creation processes, the managerial opportunities to influence value co-creation becomes to the fore. Business models may be used as static blueprints describing how organizations function and generate revenue, or alternatively as tools to address a transformation or change in a firm or in an industry. Our work addresses the latter perspective: what kind of changes are going on in the magazine publishing business as the result of the adoption of service logic. Traditionally the widely-adopted business model frameworks have lacked the attributes that are characteristic of a service logic. Our aim has been to modify the well-known and well-articulated business model canvas by Osterwalder and Pigneur (2010) into the world of services and offer a managerial tool for making the transfer towards a service-based thinking. In effect, we argue that the different building blocks of a business model change dramatically when service-logic is applied instead of goods-based logic. For example, instead of talking about target customers, we should be getting into the context of our customers and partners. Similarly, instead of managing our infrastructure, we should focus on mobilising and integrating resources within our networks. As such, a service-based business model highlights the importance of the understanding of customer context and the fostering of collaborative interaction with customers, as well as the value of a firm’s  internal and external resources. We have used magazine publishing as a case context to illustrate the implementation of a service-based business model in an industry, and we hope this will give you some ideas where to focus when entering the service business.

Blog post created by Anna Viljakainen, Visiting Researcher to the Cambridge Service Alliance

What is servitization?

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

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

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

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

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

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

How to Succeed and Make the Shift to Solutions in Today’s Fast Changing Business World

Operating in fast changing global business environments, presents real challenges even for the most successful corporate enterprises and as former market leaders like BlackBerry have learnt to their cost, competitors are always ready and waiting to step-in and take over your market share. What should “Corporates” do to maintain their competitive advantage, and plan for the future? Here Professor Andy Neely, Director of the Cambridge Service Alliance, discusses a concept that is helping to make sense of these many challenges and bear traps – it’s called “the shift to service solutions”. 



Listen to a Podcast with Andy Neely on the topic of this blog

This October like others, the Cambridge Service Alliance held its annual Cambridge Service Week Conference bringing together speakers representing the market leaders in their field, Caterpillar, Finning, IBM, Pearson, and even the Northern Arizona University - which is teaching completely online.  

We wanted to look at what we term “the big shifts” that are going on around the World as organisations look at selling solutions and services rather than products. As firms have sharpened up their business operations to become more competitive they are increasingly looking at selling the outcome that their clients want rather than merely the ownership of the product. 

All these business changes are taking place in a World where climate change, water shortages, demographic changes, and a scarcity of resources are putting huge pressures on decision makers in both the public and private sector.  

One of our Cambridge Service Alliance members with an interest in this shift to services is Caterpillar. Caterpillar machines and products might typically last for thirty years but if you sell a machine tool for one million dollars, it is probably worth about four times that if you include over the course of that products life time, the spares and support services that can be sold around it. The big challenge for Caterpillar in today’s fast changing business environment is not just how do they sell their machines and products, but how do they capture the relationship and then the support that they can then offer on the back of the sale of that product to make sure their customers get what they  want, which is the ability to move earth, or extract coal from the earth. The customer doesn’t necessarily want the machine itself, it wants the outcome the machine delivers!

Cameron Ferguson, Caterpillar

Cameron Ferguson, Manager of Global Dealer Capability in the Customer Services Support Division, Caterpillar, told me:  “Our customers make lots of choices about where they are going to get their services done, by themselves, by Caterpillar or by another party so we want to make sure that Caterpillar is at least being considered to being the preferred and primary service supplier. We can do that through solutions rather than just the traditional linear service, but a solution that says, “We can guarantee up time, we can guarantee costs per hour we can guarantee parts availability”, whatever it maybe that is tailored to that particular customers’ needs.”  

Surprisingly as the Caterpillar example shows, what we call “the vision” planning is relatively easy. You can understand the role that technology or data might play in enabling you to remotely monitor your equipment or in the education world to remotely monitor whether students are completing their course assignments and are therefore likely to graduate from the programmes they are taking.  However the planning process gets tougher when you want to put the right technological structure in place. You will need to get the right behaviour in your organisation and you will need to get your customers to accept these solutions and services! As you can imagine, that will involve a significant change process in any organisation – what we term “the shift to solutions”.

We have learnt that rarely does a single organisation have all of the capability to deliver the service solution or the outcome. Increasingly this shift requires networks of organisations to come together, to pool their resources and capabilities to create solutions for their customers.  So who are the players in these new networks and how do they emerge?

Increasingly, we are finding that these new networks involve firms who are traditionally competitors, who come together for the purpose of providing a better service for their customers. We find this work fascinating and revealing. There are some really interesting dynamics around the way firms collaborate, when they compete and how the ecosystems they are working in take shape.

Hold onto your seats, working towards these service solutions requires your business to be quick off the mark and ready for a white knuckle ride. It is clear that as your customers’ business model changes, and what they do changes, you will also need to evolve your business, but here comes the scary part, as you evolve your business, that in turn will allow further evolution in the customer’s business model too, which in turn demands further evolution in your own business plans! Responding to the challenges of business today will require a continuous process of evolving your capability.

We know that firms have thought about competition between firm A and firm B, but now people are worrying about competition between the ecosystems they have traditionally worked in together, and the roles each play in that system. You will need to think very carefully about where you want competition, and who you want to collaborate with! Maybe you should ask yourself if you want to encourage competition between some of your suppliers, and if perhaps you use multiple suppliers for different technologies or sub- assemblies, or data, which ones you might want to encourage competition in, and which part of the ecosystem that would impact on. At the same time you may want to plan for change simultaneously in another part of the ecosystem as well. This means that your boardroom strategic discussion is much more about the way the ecosystem works and your role within it, rather than the traditional model of: “we want to compete with firm A or firm B”.    

Certainly a business model that can react with speed and the ability to evolve your business model over time is very important for some industries. You will need to think about the clock speed of the industry you are in, so in some industries the pace of change will be incredibly fast while in some industries it will still be more measured, so therefore you can afford to be slightly slower in evolving the business model.

One of the things we have learnt in the Cambridge Service Alliance is that there are ten basic lessons that you need to get right if you are going to make a successful shift to solutions management. Let me give you three of these.; You will need to understand risk and the transfer of risk and if you offer solutions to your customers find out what risks you are being asked to take on and how that plays out over the longer term? The context really matters too, so you have to ask yourself – “Are we ready to make this transformation as an organisation, can we break away if we are a product or technology business from our technology heritage and worry more about service?” In terms of context, you are really asking- “Is the customer ready for our service?”

The third question to think about is: how do we design the customer service experience to create the right emotional response as well as delivering the pure technical service. Our Alliance partner, Finning have thought carefully about what their customers’ want and if they can support their customers. Finning know that their customers want equipment that works, they want no down time so they  have put processes and products in place that meet those needs,  but they have also built a centre that creates a great customer experience too. Customers walk in and have been known to say: ““Wow” are you really monitoring three-thousand pieces of equipment remotely, are you really watching what is happening, and looking after our equipment, you are like a safety blanket for us?” This is a valuable service so that emotional response from the customer is partly created from the design of the control centre in Finning’s case as well as the products and services it is selling.  

Lucy Courturier, Finning

Lucy Couturier, Finsight Manager,  Finning,  told me: “We have really become involved with the concept of Ecosystems since working with the Cambridge Service Alliance and we now ask ourselves: “who are all the players”? We take into account everybody that has an impact or that we impact in our day to day operations. We have customers, competitors, suppliers, and we need to understand how each of those interact to be able to provide the solutions that customers want. We can’t just look at one part of that puzzle, we need to understand that complex web of relationships to manage it effectively. The customer experience is as important to us now as the business side is. The customer experience and the relationships they have with us, is as critical in moving us forward.”

Mark Anderson, President, Schools & Higher Education Strategy & Business Development, Pearson, says the growth in those needing higher education in the World and the technology changes that are taking place, means the sector will need to adapt to change on both fronts on a huge scale in the future. He told me:  

Mark Anderson, Pearson

“There is an enormous growth in demand for higher education, at the moment there are about 180 million people in tertiary education, and in about thirty to forty years’ time that will rise to about  500 million people. Countries like China, Brazil, India and South Africa will expand their education systems and at the same time the development of technologies is pluralising access to and availability of education, so we will we have to bring these two changes together.  

“The ecosystem concept is one we have worked closely with through the Cambridge Service Alliance, we probably didn’t use it previously but if you are a company like Pearson where for hundreds of years you have essentially been selling books, you had a relatively simple ecosystem consisting of book producer, distributor or intermediary, book seller, and student, there was a linear progression. Now there is a far more complex diverse international mix of organisations who have a stake in education. Governments are now more activist in education too, so we need to track a world which is more complicated with a lot of new entrants who are having a rapid and an immediate impact. Our business environment is changing very quickly and an ecosystem model is a very good way of tracking that.”  

As these stories from Finning’s and Pearson show the experiences of others are really an important part of the business journey. Ecosystems are a really good way of thinking how you might innovate your business, how you might come up with services and solutions but remember just because you have come up with them, doesn’t mean to say that you can implement them. There is a lot of hard work to do to bring those visions, those ideas, those innovations, to reality.

I hope we can help our partners come up with the innovations and then help them execute them too, this is what we mean by the shift to service solutions. Hold tight, it could be a roller coaster ride, but we guarantee it will be full of excitement.

[More on this event]

Struggling to Make the Shift to Solutions: Write Your Own Obituary

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

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

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

Trading off service experience and service efficiency

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

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

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

Professor Andy Neely is Director of Cambridge Service Alliance at the University of Cambridge, and a world authority on performance management and complex services.

www.cambridgeservicealliance.org

Cisco 14% rise in profits from services sales

Cisco recently published details of its 14% rise in profits from services sales.  We see this as part of the general trend for companies to move from selling products to providing services. Companies such as Dell and Xerox have diversified into services, following in the footsteps of IBM which has successfully grown its consulting and IT services business while pulling out of the PC market.

Service companies now account for 75% of the economic activity in developed economies and the number of firms providing services is growing rapidly. The reason? Companies are less interested in owning the product. They want the outcome from using it and that translates to a product, backed by services.  Our work with firms as diverse as BAE Systems and IBM shows that companies face common challenges as they take on new responsibilities:- defining what customers value, delivering it and managing the information and risks.

Professor Andy Neely is Director of Cambridge Service Alliance at the University of Cambridge, and a world authority on performance management and complex services.

Why service innovation is different, and why that matters

Service companies comprise 75 percent of economic activity in developed countries.  But companies are often seen as less innovative with service provision than with product design, manufacture and sales. But is this really the case or we are just misunderstanding the process of innovation in services?  We recently did some research to find out.

The focus was put on four providers of complex relational services, such as performance-based contracts that guarantee product availability. The research has shown that the conception of the product orientated innovation process  (company innovates- company sells – customer uses) doesn’t hold in the relational services, where the customer’s involvement in co-creating the service is accentuated. That means that the new services development is simultaneous to their production and use, thus making the customer a co-creator of the service. Firms that prepare properly for these two characteristics – simultaneity and co-creation – before engaging in relational service provision are likely to be more successful.

The service contract is designed, contracted for and then delivered by the service provider on the basis of the outcome that the customer wants. The service is innovative when the service provider offers a new outcome- an outcome he never provided before. The innovation actually takes place through interaction of the service provider and the client, making them co-creators of the service through the delivery.

Risk and reward in service innovation have a different nature as well. Although the service provider may invest in the infrastructure necessary to provide the new service, through payment of service fees the client effectively co-finances the innovation process.  As customer signs a long-term contract, the service provider avoids the market risk. But the service provider must address the risks inherent in delivering a novel service, whether these are higher service costs, contract penalties, loss of profits, or a dented reputation.

Problems with initial service delivery might cause the company to withdraw from the innovation. This actually disables it to understand the lessons from the initial innovation and reap the benefits that accrue over time through additional services to existing and new clients. The potential benefits for the service provider include: first-mover advantage, enabling the firm to leverage its learning by using it to secure further contracts with existing or new clients; cross leveraging innovation infrastructure investments and learning across other service contracts; and using the initial service innovation as a catalyst for other types of innovation –both services and products.

Firms that wish to be good service innovators need to have cross-functional teams and company-wide incentives to innovate, in other words an organizational-wide entrepreneurial culture should be encouraged throughout the company. This stresses how crucial adopting a long-term approach to innovative services is. The client and the service provider have to have a long-lasting, mutually trusting relationship in order to capture the full benefits of the innovation. They have to be well acquainted with one another in order to overcome the initial problems.

Ivanka Visnjic,
Research Lead, Cambridge Service Alliance

The research reported in this blog can be found in this report 'When Innovation Follows Promise - Why service innovation is different, and why that matters' Executive Briefing, Ivanka Visnjic, Taija Turunen, Andy Neely

Social media and the new way of networking

Online profiles on social networking platforms such as LinkedIn and Facebook have powerfully altered the way we network and build relationships with colleagues and work partners.  Paradoxically, the intensification of competitive pressures in business resulting from the information age is accompanied by an opposite phenomenon, of distributing help more willingly to connect people to a wider group than ever before.

It is not new that people from the same circles help each other out, be it to find a job or share access to new opportunities.  Now, as social circles expand to their widest through social networks, the definition of “friends” is also influencing who we are willing to help, in the expectation of a returned favour later on in life.  Every new encounter is perceived as a potential resource for a future time, and comes with positive expectations.  

People who belong to the same network are most likely to be competing for the same job or the same promotion at some stage in life or another.  Yet the members of a common online social network are inclined to think of themselves as “friends” or connections that they want to help out.  In the academic jargon of social networks, online contacts serve as “brokers”, people who may introduce or refer one another to a contact or for a position.  Sometimes, this happens between people who may never have met each other in person.  A few connections in common or a few keywords may be enough.

Online profiles expose our social networks to everyone.  The effect is partly to show how well-connected we are, a well-recognised measure of “strength” or social capital in the business world (Kilduff et al., 2011, Inkpen & Tsang, 2005).  But the collateral is that sharing our network to friends and colleagues, opens up the same resource to them.  Is the power of social media to have instituted a silent etiquette, of never to refuse an introduction?

Meantime, in the physical world, shrinking developed economies mean increasing competition for every single job position.  In investment banks, 2000 applications get narrowed down to 30 new hires.  In less structured professional environments such as entrepreneurship and business, fewer and fewer new technologies or new ideas ever turn into profit.  Competition wipes out small and large companies every day, products become obsolete ever faster, and entire industries disappear overnight.  So, is online social “brokerage” leading to a more efficient matching of human resources and work, or is it enabling the identification and selection of the very best and very few for the over-subscribed opportunities?

Claire Weiller

Cambridge Service Alliance

Beyond Servitization: What's Next?

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

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

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

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

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

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

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

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

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

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

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

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

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

Successfully Implementing a Service Business Model in a Manufacturing Firm

The expected economic benefits of ‘servitization’, a popular trend among durable goods’ manufacturers designed to expand the scope of their offerings from products into through-life-cycle services, have been disputed in light of recent empirical evidence suggesting that hurdles associated with the implementation of services may even result in performance decline.

In a recent study we undertook extensive research into ten sales-and-service subsidiaries of a successfully servitized manufacturing multinational to shed light on this ‘service paradox’.  The results showed that success in setting up a service business in a manufacturing firm results from the presence of three operational capabilities that facilitate service performance. 

1. a skill set capable of extending the relationship with the broad client base;
2. the capability to develop sophisticated service offerings that provide better coverage of customers’ needs; and
3. the ability to offer all the services efficiently.

Maintaining the breadth of service presence while deepening customer relationships can be a challenging balancing act, since capabilities that contribute to ‘service presence’ may conflict with the deployment of ‘service development’ and ‘service process’ capabilities. This research is outlined in a recent paper which offers to academics and practitioners of servitization a guiding framework within which to develop a comprehensive set of service capabilities, and highlights the nature of their relationships.

Ivanka Visnjic

Cambridge Service Alliance

Challenges and Issues of Engineering Asset Management

Asset Management is the coordinated activities of an organisation to realise value from the physical assets it owns and uses. While Asset Management is not new, new approaches to, and the new profession of, Asset Management, are required to meet the demands of operators, shareholders and customers.

Owners are demanding greater value, for less overall cost, from their assets. New technologies enable higher performance and greater safety, but at a price. Initial purchase costs are rising, leading to longer periods in service. Maintenance requires a more highly skilled, and so more expensive, workforce.

New Approaches
Asset operators are adopting new approaches to Asset Management. Increasingly they are owning, and maintaining, fewer assets and increasingly relying on complex organisational structures to provide them. Much greater coordination and sharing of data and resources, across multiple organisations is required, to make decisions to the benefit of all those involved in owning, using and benefiting from the assets.

In September 2012 the Cambridge Service Alliance brought together leading industry practitioners to discuss the challenges and opportunities that Asset Management must face over the next five to ten years. These experts identified the barriers and enablers to efficient Asset Management, and discussed the challenges that must be overcome to make better use of scarce and expensive assets.

Improving Asset Management practice
The group identified four key areas that must be adopted or utilized more effectively to improve Asset Management practice:

1. Effective decision making. Improving decision making across the organisation, through better use of longer term financial, and non-financial, metrics to deliver value for all involved in managing assets.
2. Organisational changes. Organisations must evolve to enable better decision making and share knowledge and skills, breaking down silos and boundaries resulting from functional specialism and multiple cost centres.
3. Data capture, sharing and standards. Improving the quality and availability of the information available for decision making.
4. Predictive analytics. New information technologies are available to improve Asset Management, but several barriers prevent their effective use.

This text is an extract from the recently published 'Engineering Asset Management - Issues and Challenges' Executive Briefing released by the Cambridge Service Alliance.  The full Executive Briefing is available here.

'Tech is destroying the line between Manufacturing and Services' Fortune Article - Response from Andy Neely

Saul Kaplan’s article Tech is destroying the line between manufacturing and services makes interesting reading, but it rather misses the point. He says: “It’s hard to tell the difference between a manufacturer and a service provider and the distinction is limiting.” But the key consideration here is not whether you are a manufacturer or a service provider. It’s about how you create and capture value. Manufacturing firms across the world are embracing this challenge - innovating their business models towards services, powered by the latest technologies. They are doing it by focusing on four key issues:

1. Innovating the value proposition by concentrating on the outcomes customers actually want. The old Theodore Levitt quote encapsulates this well – customers don’t want ¼ inch drills, they want ¼ holes.
2. Innovating the value delivery system. Focusing on what they should do themselves, what they should ask others to do, who they should partner with and how they should pool capabilities to deliver outcomes.
3.  Managing inherent risks. Taking responsibility for outcomes involves risk which must be recognised, accepted and carefully managed.
4.  Taking account of the ecosystem – that is all the organisations able to influence the service provider’s ability to create and appropriate value. For example, by managing the ecosystem Apple retains far more of the sales price of its products than its competitors do.

The article mentions 3D printing, but this is only part of the story. Fantastic opportunities are emerging across diverse sectors, enabled by innovative technologies such as remote product monitoring, geo-positioning and big data. And it’s not just in new media organisations such as Google and Apple. BAE Systems, one of the world’s largest defence and aerospace companies, has steadily geared up the service side of its business, and today 50 per cent of revenue comes from service and support, maintaining assets and equipment with a lifetime of 30-years or more.

Recent weeks have seen big name brands Dell and Xerox announce a move from making products to providing services. This shift is inevitable in the face of falling product sales and margins. What’s needed is a clear understanding of the boundaries of your business, less focus on the enabling technologies and greater emphasis on the outcomes customers value.

  

Professor Andy Neely, Cambridge Service Alliance

Professor Andy Neely is director of the Cambridge Service Alliance, a leading partnership between global business and academics focused on understanding and developing service systems.

http://www.cambridgeservicealliance.org/

Why servitise: Alternative rationales

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

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

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

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

In strategic terms there are four key reasons for servitization.

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

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

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

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

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

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

Andy Neely

Director, Cambridge Service Alliance

Five predictions for the future of services

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

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

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

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

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

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

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

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