25 March 2013

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

21 March 2013

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.

11 March 2013

'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.

5 March 2013

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