The new business models of digital servitization

Servitization as a factor driving business growth and differentiation

Mario Rapaccini, PhD, University of Florence and ASAP Scientific Director

To understand why competition between industrial companies is becoming increasingly focused on smart products, we must first examine the concept of servitization.

The term “servitization” refers to a strategy in which manufacturing companies complement their product portfolios with advanced services and integrated product-service solutions. This strategy can be observed in all industrial sectors, whether B2B or B2C, such as the automotive industry where vehicle manufacturers also provide mobility solutions based on long-term rental formulas.

Among plant and machinery manufacturers, we find similar offerings referred to as “Equipment-as-a-Service”. For example, so-called “heat-as-a-service” offers are gaining ground in the heating, energy and gas sector, while “pay-per-wash” solutions in which a dishwasher or washing machine is rented together with a supply of soaps and detergents are becoming fashionable among household appliance manufacturers.

The supply of goods becomes a dedicated service

Academics have been studying this phenomenon for more than 20 years and have come to the conclusion that, when performed correctly, servitization can act as a driver of business growth and differentiation that strengthens leadership positions, stabilises cash flows and protects against economic headwinds and downturns.

As always, the shift is not just organisational and technological but first and foremost cultural in nature. Traditional companies tend to have a product-centric culture in which product sellers, designers and manufacturers are seen as the key players while customer service is considered a “necessary evil” required to complete the sale of the product. This differs markedly from a “servitized” company, were the focus shifts to the customer’s needs and the company’s ability to deliver integrated solutions capable of meeting those needs efficiently and effectively, however specific and personalised they are. A servitized company offers advanced services in which the manufacturer of the good is also the solution provider, and is contractually obliged to guarantee key levels of performance in customer’s processes (whether a business or a household).

Examples of this are “full-risk” contracts, which establish risk-reward sharing mechanisms for achieving certain performance targets (e.g. production volumes, availability, quality, etc.) and in which the supplier is responsible for deciding on preventive and corrective maintenance policies.

Digitalization makes servitization possible

The application of digital and Industry 4.0 technologies to products and services is accelerating the process referred to by academics as Digital Servitization.

A typical example of the way in which technology is a means to servitization rather than an end in its own right is that of Rolls-Royce Plc, a leading manufacturer of aviation reactors. A few decades ago, American Airlines asked Rolls-Royce to provide an innovative, all-inclusive maintenance service that would include spare parts, equipment, and overhaul and maintenance work in the fee. A payment mechanism was established based on the engine’s number of flight hours (the well-known “Power by the hour” contract). This service took years to set up in terms of new processes and systems for efficient coordination of the global service network, for managing engine and aircraft fleet data, and for developing diagnostic and prognostic models. Today this Total Care programme is facilitated by industrial internet platforms, sensor networks and cloud computing infrastructures that, with the support of predictive algorithms, allow for cybersecure monitoring of the engine status in order to decide on the best intervention policy.

This means that a smart product is actually a mechanism for delivering smart digital services and the product-service combination becomes a digital and smart system consisting of the product, the service and a great deal of software (embedded or otherwise). In the case of Rolls-Royce, the IoT enables a two-way exchange of data between the smart product and all parties involved in or affected by the service processes (airlines, OEMs, TPMs and airport service providers, to mention just a few). Furthermore, algorithms can be used to monitor and verify engine operation and to optimise the process as a whole, thereby determining the most suitable machine shutdown time. Finally, the collection, archiving and analysis of operational and performance data, coupled with usage and environmental conditions, provides new knowledge that is useful for continuous learning and improvement of algorithms and for new product design. Ultimately, it is both necessary and extremely useful to exploit the opportunities offered by digital technologies to implement servitization strategies. It has been proven that the best results are achieved when digitalization and servitization are pursued as part of a common strategy with coordinated and integrated projects.

The future lies in data (collected and processed)

The Internet of Things, cloud computing and data analytics are the technologies that enable digital services and are now being widely adopted by industrial companies. This was illustrated clearly in an article by Porter and Heppelman published in the Harvard Business Review in 2014. The authors identify four purposes of the data collected by smart products, and consequently four different types of smart products.

• The first is remote monitoring of operating conditions in order to alert the user of problems, faults and malfunctions.
• The second is remote control, i.e. the possibility of remotely controlling and configuring an asset.
• The third is process optimisation. In this case, it is necessary to know which actions are required to optimise processes and services of interest to the customer. Examples include minimising energy consumption according to type of use, maximising production, determining the optimal time for shipping consumables and spare parts and scheduling downtime and preventive maintenance.
• The fourth purpose involves attaining complete decision-making and operational autonomy. This is the highest level of intelligence typical of so-called cyber-physical systems. Examples include unmanned vehicles, intelligent AGVs, advanced manufacturing systems, collaborative robots, and in general any sentient machine that is able to make decisions and perform actions automatically, in some cases using artificial intelligence that is continuously upgraded by the manufacturer (such as Tesla, which updates its firmware at night).

Servitization in the capital goods sector: an unstoppable evolutionary process

Italy’s Transition 4.0 incentives followed by the pandemic led to a significant and rapid change in what the market today sees as must-have requirements for industrial plants. Virtually all manufacturing companies have developed digital services (provided free of charge or for a fee), which are delivered thanks to the diffusion of IoT and interconnected systems. These are generally basic services such as remote monitoring, real-time transmission of alarms and alerts, periodic transmission of analytical reports with performance indicators, provision of dashboards and synoptics via web apps, and the possibility of controlling certain settings remotely. In some cases, however, proposals already exist for advanced services such as remote and on-site predictive maintenance, technology consultancy services for improving process efficiency, emission certifications, energy consumption control, environmental footprint calculations, and audits relating to occupational health and safety or regulatory compliance.

In just a few years’ time, the availability of data and information will make it easier for manufacturers to assess risks on a case-by-case basis in order to develop offers for operational leasing (equipment-as-a-service) and services with performance guarantees (outcome-based services). Even if the change occurs over a period of many years, it will have a major impact on the industry’s equilibria and business models so it is essential to be prepared.