Creating Customer Value Through Services

In the Cambridge Service Alliance we have long talked about the importance of focusing on outcomes - understanding deeply and intimately what it is that your customer or even your customer’s customer values and exploring how you can deliver this. One of the most powerful consequences of thinking this way is that it encourages you to change the way you think about the boundaries of your business.

Take, for example, Caterpillar - what is it that their customer’s customer values? Imagine, for example a mining operation or a quarry. Clearly the customer wants a safe working environment. Clearly they want equipment that is reliable and productive. Clearly they want minimum disruption to their operations and production schedules. But ultimately what they want is to be able to extract minerals in the volumes they need at the lowest cost. If lowest cost per tonne is what the customer wants, what can Caterpillar do to help their customer achieve this?

Well the first thing is they can recognize that the mine or quarry is a system - to achieve lowest cost per tonne you have to optimize the system and get all of the people and equipment working in harmony together. It is not enough for Caterpillar to be able to guarantee that their equipment has the lowest operating cost or even lowest total lifetime cost. Unless Caterpillar’s equipment works in harmony with the rest of the quarry the customer won’t achieve lowest cost per tonne.

Working in harmony requires coordination - coordination across mixed fleets of assets and equipment. One of the services Caterpillar and their Dealers now offer are quarry optimization services. They use the data coming back off their equipment to help the customer identify production inefficiencies and lost time. Trucks, for example, have sensors in their beds. As the truck is loaded with material, the sensors record the weight of material in the bed of the truck. So Caterpillar knows when trucks are fully loaded. They also track location, through GPS data, so if your data shows a truck is fully loaded, but its GPS position is not changing then its not moving. That’s lost time - once the truck is loaded it should be moving off up the haul road en route to dump its load in the crusher.

There are loads of similar examples. Bose thinks of itself not as a speaker manufacturer but as providing sound distribution systems. Pharmaceutical firms are reinventing themselves as healthcare solutions provides - seeking to find a new way to complete as the development cost of drugs increases and more and more drugs come off patent.

At this year’s Cambridge Service Alliance conference - creating value through customer services - scheduled for the 6^th October - we’ll be hearing from three leading providers of services and solutions - ABB, Rolls Royce and Zoetis. Each of them will be explaining how they have managed to develop business models - often enabled by data and analytics - to create value for customers by focusing on the outcomes their customers and their customer’s customers really want.

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.