Why B2B’s Should Invest in Servitization Over Digitalization
It's difficult for mid-market and enterprise B2B firms to cleanly separate the topics of servitization and digitalization.
In today’s data-driven, digitally fueled world, it’s often difficult for mid-market and enterprise B2B firms to cleanly separate the topics of servitization and digitalization.
In today’s data-driven, digitally fueled world, it’s often difficult for mid-market and enterprise B2B firms to cleanly separate the topics of servitization and digitalization. This leads to unnecessary confusion – and competition for resources – within organizations.
At The Service Design Group, we firmly believe that the opportunity and path forward is one of servitization, not digitalization, recognizing that the servitization journey will, inevitably, include digital components (afterall, it is the 21st century!). That is to say, firms should invest in servitization (and the digitalization needed to support an as-a-service transformation) rather than investing solely in digitalization.
First, definition of terms.
Servitization, or as-a-service transformation, is when a firm – for the first time – produces and collects service-based, or service-derived, revenue. It’s when a firm moves beyond having revenue that comes exclusively from selling product(s). Servitization begins when the firm takes steps to collect its first service dollars (non-product revenue) and continues until the firm has significant service(s) revenue from a portfolio of in-market service offerings and is, at that point, servitized.
Digitalization, or digital transformation, is when a firm applies digital technologies to change how it runs and operates its business. In the past, this was a story of digitizing paper and manual processes. Now, it’s a story of harnessing data and applying machine learning, artificial intelligence and cloud data repositories to find efficiencies, enhance insights and augment decisioning. Often, digitalization manifests itself within organizations as a function-by-function need for enablement and automation. The marketing function may adopt digital marketing practices and use platforms, technologies and vendors to do more digital marketing and automation while the sales function may add an inside sales group and adopt a CRM. Likewise, R&D may streamline tasks with automation that speed learning loops and insights while Supply Chain may optimize production and delivery with instruments and sensors that can notify when customer inventory is running low and automatically schedule replenishment. The firm may also roll out ecommerce, leverage various digital selling channels (e.g. Amazon and Alibaba) and explore augmented and virtual reality for customer service, troubleshooting and maintenance.
Now, the investment case!
Servitization diversifies revenue. Digitalization does not.
At its core, servitization is about creating net-new revenue streams from services. It is the path forward for firms to diversify revenue. In particular, it is the only way to change the type, behavior and characteristics of revenue. Only servitization, or as-a-service transformations, can produce recurring revenue. No amount of digitalization – in the absence of servitization – will contribute diversified, recurring revenue to a firm. In fact, most digitalization activities will generate no directly attributable revenue. Sure, there may be cost savings and margin improvements from efficiencies, but no top line change.
Servitization grows revenue. Digitalization does not.
New service offerings grow revenue with existing customers and improve your ability to win business from competitors.
In addition to creating diversified revenue, servitization provides a powerful revenue growth engine. New service offerings grow revenue with existing customers and improve your ability to win business from competitors. New service offerings also enable you to attack adjacent markets in new ways. And, inevitably, your new service innovations and offerings will lead to the identification of yet unseen revenue growth opportunities. For example, a firm may first grow revenue by monetizing a warranty on a device. The warranty allows the firm to displace some competitive business. Then, the firm identifies opportunities for financing, further growing revenue. This virtuous circle of revenue growth can progress into new business models, including as-a-service offerings and outcome-based pricing. Each of these servitization advancements are capable of significantly growing the revenue capture potential of the firm overtime. Where and how will digitalization produce a revenue growth result? Nowhere. It won’t!
Servitization creates enterprise value. Digitalization does not.
There’s one more secret weapon of servitization. Servitization creates enhanced enterprise value. For most firms, enterprise value is the name of the game. It is what shareholders expect and demand. Time and again, the market and the street reward firms that demonstrate recurring revenue from services with enhanced enterprise values. It makes good sense. The predictable and smoothed nature of recurring revenue is attractive to investors. As with revenue diversification and revenue growth, one must ask: where are the examples of digitalization producing an enterprise value result?
What investing in servitization looks like.
The key is that investing in servitization will drive servitization and digital outcomes!
Investing in servitization is a strategic choice and commitment, just like the choice to invest in digital. The key is that investing in servitization will drive servitization and digital outcomes! That is to say, instead of “just doing digital” the investment will go towards servitization, and the servitization strategy and goals will drive the digitalization needed to win. To be effective, any investment in servitization should create an innovation pipeline of servitization options and a managed portfolio of service offerings in the market.
Generally, the first movers, disruptors and market leaders in servitization and as-a-service transformations typically are willing to invest at least 6% of revenue into servitization with a three to five year horizon on results. Not bad, for a payoff of revenue diversification, revenue growth and enhanced enterprise value! Or, you could spend the same amount and take the same amount of time, and “be more digital.” You decide!