5 Core Characteristics of Servitization Leaders

For today’s original equipment manufacturers (OEMs), they must ensure that history views them in the same lens as these leaders – as brands that innovated and adapted their business models and service operations to meet changing customer and technoloare.

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The phrase “history repeats itself” is common for a reason. In every generation, innovations and radical market disruptions have transformed businesses, industries, economies and livelihoods. Some have chosen to cling to the past and resist the call for change, only failing to remain relevant. While others have embraced and enabled change and ultimately prospered.

Companies like Blockbuster, AOL and Blackberry are now irrelevant because innovative leaders like Netflix, Google and Apple replaced them. For today’s original equipment manufacturers (OEMs), they must ensure that history views them in the same lens as these leaders – as brands that innovated and adapted their business models and service operations to meet changing customer and technological demands.

In the fast-approaching servitization-centered economy, where companies will no longer just sell products, instead selling access to and the outcome those products deliver, manufacturers must redefine the way they do business. The after-sales service side of manufacturers’ businesses will be in focus more than ever and will be critical to their ability to deliver maximized product uptime as a service to their customers.

Unfortunately, there is no magic switch that will transform manufacturers from their current state of reactive, break-fix service to the future state of operating product uptime-centered servitization models, profitably. In fact, many OEMs, industry analysts and academics suggest the complete realization of a servitization-centered economy could take anywhere between five and 15 years. But what are the core characteristics of the fast-growing list of leading OEMs that are accelerating their transformative servitization journeys?

In my role, I collaborate with some of the most respected brands in the world as they strive to evolve their service operations and business models to maximize the uptime of the products they manufacture. These tight partnerships have allowed me to observe five key characteristics the leading OEMs share – traits that are enabling these brands to distance themselves from the laggards and accelerate their journeys to servitization.

  1. Optimized service parts supply chain. For decades manufacturers have based after-sales service on a reactive, break-fix business model, meaning a piece of equipment is sold and delivered, it breaks, a service call is made, a service part is sold and shipped and eventually inserted by a technician. The risk and the cost of downtime are all on the customer. In a servitization-centered business, however, manufacturers must ensure they have a sophisticated service parts management solution in place to ensure repairs are made preemptively – this requires technology that enables service parts to be available when and where they are needed. Executives around the world are taking note of the often sub-optimized, but lucrative, after-sales service space. According to McKinsey, “growth through aftermarket services offers a comparatively short and straight path to new revenue streams” and that an optimized after-sales service organization results in “improved financial performance that sustains the company through the larger, long-term bets it makes.” An optimized after-sales service organization will not only help manufacturers increase revenue, profits, margins, but also enhance the overall customer experience.
  2. High-level of service part fill rates. By identifying potential product failures before a breakdown occurs, service calls can be preemptively scheduled, and parts and materials can be moved to the right location to perform maintenance and maximize product uptime. This will enable manufacturers to transform their service parts supply chain from a costly and inefficient “just in case” model, to a highly efficient “just in time” model, where inventory levels are optimized, and service part fill rates are near 100 percent.
  3. Optimized service part and service contract pricing. It may seem obvious that selling a service part or service contract for the optimal price is a key way to create competitive differentiation, but unfortunately too many manufacturers are still using outdated methods like cost-plus or simple spreadsheets. With e-commerce players like Amazon and eBay becoming more focused on the service parts space, competitively priced parts will become more important than ever. Modern service parts pricing technologies ensure the end customer has a great experience, while the manufacturer is simultaneously maximizing revenue and margins.
  4. Subscription-based uptime service models. In the future, OEMs will no longer report on the number of new products sold, or even service parts revenue. In fact, they will follow the path many SaaS companies have taken, reporting on recurring revenue from subscription-based services. Customers will subscribe to their equipment much in the same way as they do their Netflix subscription, paying for output and value.
  5. Executive buy-in. In research from Worldwide Business Research (WBR) and Syncron, 66 percent of manufacturers indicated that they are beginning to feel pressure from the executive suite to shift away from a reactive, break-fix service model and move towards one that is focused on maximized product uptime. However, 98 percent of equipment end users indicated they want to see more manufacturers offer service agreements that offer maximized product uptime. To succeed now and in the future, manufacturers must be willing to make changes soon, otherwise they will be left behind. The C-suite can’t just demand maximized product uptime, they must also establish the necessary infrastructure, resources and budget to make it possible.  The realization of a servitization-centered economy is a marathon, not a sprint, and it’s here to stay. The race is on and the gap between the leaders and the laggards is becoming increasingly noticeable. OEMs that have a strong vision for maximizing product uptime, with executives that are driving their company to make the vision a reality, have a head start on this journey. Those that make the necessary investments in technology, resources and training – optimizing service parts fill rates and pricing along the way – will be the ones to come out on top.