While the promise and need for servitization is recognized and proven across markets, most firms are not participating in building innovation that isn’t product based.
The Service Design Group lives, breathes, eats and geeks out on servitization, digitalization and as-a-service transformation, and we have since 2011. In spite of our excitement, however, we have to face one truth: the state of servitization! While the promise and need for servitization is recognized and proven across markets, most firms are not participating in building innovation that isn’t product based. Outside the software market and limited attention from OEMs, Industrials, and Healthcare servitization progress is slow.
Instead, firms are focused on “transforming” and investing heavily in digital technologies and customer-centricity (which they confuse with servitization). Having seen a number of servitization journeys from zero to completion, we provide these stages as an objective measure of the steps in the Servitization Journey.
Not Started
In our experience, “not started” comes in a few flavors: Complacency, Waiting and Watching, or Missing the Point.
Complacency is when a firm thinks “we don’t need to servitize because our product business is fine.”
Waiting and Watching is when a firm recognizes servitization is happening, but out of fear, perceived risk, or lack of agility, they do not act.
Missing the Point is when there’s a lot of emphasis inside the company on customer experience and digitalization.
Whether you’re Complacent, Waiting and Watching, or Missing the Point, the easiest test to determine if you’ve started or not is this: you have not started if your business revolves around developing, marketing and selling products and your revenue comes exclusively from product sales, i.e. you have only product-derived revenue!
Started
The switch from not started to started comes when you decide to servitize in earnest and actively invest in and prioritize growth through servitization. Specifically, you make the decision to invest in the addition, cultivation, growth and strategic importance of service-derived revenue, tied to a time-bound target expressed as a % of revenue from services. Often, this requires exchanging your product margin for future recurring cash flows. The decision to start typically comes from external pressures, including commoditization, downward pricing pressure, and the emergence of new – often digital – entrants, who are “disrupting you” with service-based business models. Whether you proactively arrived here or were forced into it, if you made a choice to actively invest and embrace the short-term trade-offs, you have started servitization.
Delivering
After starting, it’s all about designing, building, launching, testing and refining your first services. You’re in the service delivery game now! You must build, partner or buy new capabilities and explore new partners and ecosystems. Effort is given to generating a pipeline of new service innovations and maturing the most promising ideas towards commercialization via a continuous enhancement mindset. Importantly, you must establish “Living Labs” to co-create and refine new service offerings directly with your customers, experimenting with pricing models, outcomes and service levels. And, it’s imperative to embrace the often abused “fail fast and fail often” mantra so popular with innovation thinking. It does apply! Not all service ideas you decide to deliver will work out and stand up to actual customer use and that’s OK! As you iterate through what’s working and isn’t, you’ll start approaching a compelling basket of services that have true potential to change your business and deliver on the promise of service-derived revenue.
Focused
As your emerging services portfolio starts to deliver, it’s time to take stock of where you were, how far you’ve come, identify what’s really working, and understand how to truly transform your business. We like to approach this from a “unit economics” point of view. That is, find a single metric to rally around. The key is to find something that all functions of your organization can understand and contribute to that creates a meaningful departure from your existing product world! Of course, the focus is ultimately on revenue and growth, but to truly focus your teams and servitization efforts, you need a servitization-specific unit economic beyond the financials. With this focus, you can really hit your stride and start growing your services in earnest.
Diversified
When you get here, your hard work is paying off! Your focus on a singular, servitization goal generated real, diversified revenue streams. No longer are you just a product company! You now have a revenue mix and the nature of your service-derived revenue is becoming clear to the organization. The fears and risks previously held by many are eroding. The hits you took to margins are giving way to repeatable, predictable recurring revenue which should be translated by executives towards financial markets as growth in Enterprise Value. Likewise, cannibalization of your product business suddenly no longer sounds terrible. As revenue diversification continues, a new goal emerges: get to 50% or greater of revenue from services!
Servitized
Once you achieve a service-dominant revenue stance you are servitized. A significant portion of revenue comes from service-based offerings. Servitization – and all that comes with it, from customer-centricity to business model flexibility and deeper barriers to entry – is now in the DNA of the firm as your teams build and deliver services on a day-to-day basis. The firm is recognized as a market leader and commands increased levels of renewals and customer intimacy with its clients. Even better, the firm has an improved enterprise value, as The Street tends to assign greater value to service-derived revenues (i.e. the recurring value of predictable cash flows is attractive to investors).
Congratulations! You have done what few do.
