Why manufacturers are becoming service providers

Manufacturers that service their products after sale or on a rental basis are in the vanguard of a trend which can revitalise the sector

Why own when you can rent? This question is one of the most intriguing issues of business today. Zipcar offers cars by the hour. Suddenly the concept of buying manufactured hardware seems obsolete. HSS offers tools for hire. Builders get the kit they need when they need it. They avoid blowing big bucks on specialist instruments they might only need once every six months. Businesses today rent everything from diggers, data storage and computing power.

It’s more than a niche. The switch from manufacturers selling products in a one-time transaction to a rental service, complete with aftercare – a model known as “servitisation” – is the biggest thing to hit manufacturing since the internet.

Service success

In fact, the concept pre-dates the web. The likes of Xerox, Rolls-Royce and Alstom have been doing it for more than 20 years. Rolls-Royce began offering aircraft engines as a service, rather than a product, back in 1997. Now almost all their Trent fleet of engines are supplied as part of a complete service package, called TotalCare.

Repairs, maintenance, even complete engine replacement are included in the TotalCare fee. It means aircraft makers and airlines avoid up-front capital expenditure. And the deal guarantees annual recurring revenue for Rolls-Royce.

Medical device manufacturer Stryker has made the transition from product seller to service provider. Hospitals take Stryker’s devices on a pay-as-you-go model. The medical devices are connected to the web, so usage can be monitored remotely. Stryker’s technical partner Gemalto managers the billing and usage monitoring.

Jamie Longmuir of Gemalto explains the model works particularly well in the United States, where there’s a complex interaction between hospitals and the insurance companies which fund treatment. “It means hospitals don’t face budget-based uncertainty, rather they can test devices and pay for them on an ongoing monthly basis in a way that aligns with how much they are in turn paid by their patients’ insurers,” he says.

Also, the nature of the relationship between vendor and buyer has changed. Under the previous regime, a product would be sold and that was the end of the conversation. Now Stryker is incentivised to offer upgrades and repairs. And both parties learn from the deal.

Mr Longmuir says: “By switching to a software-based business model, Stryker is able to analyse which features the medical institution is using on the medical device and optimise the features in a way that’s best suited to them. Previously products were sold by the manufacturer, who would then have no indication of how their device was being used by the customer and, in turn, be unable to offer any additional features.”

Manufacturers motives for service offerings graph

How it works

In order to monitor usage rates, manufacturers are connecting devices to the internet. Tractor maker John Deere is now a world leader in software and location-based services, which were developed to help customers maximise farm yields. The modern combine harvester is fitted with sensors that track the exact location of the vehicle, and can tie-up with sensors on, for example, fertiliser equipment, to monitor nitrogen and potassium levels and cross-reference it with yield data. It’s the sort of service usually expected from a big data or software company.

The trend for servitisation is sweeping almost every industry in its path. Even niche sectors are being transformed. HP offers printer ink as a service. Pick one of three plans, occasional, moderate or frequent, and pay a monthly fee. When the printer is low on ink a new cartridge is posted automatically. A review by consumer magazine Which? concluded: “If you regularly print colour pages or photos, Instant Ink is likely to work in your favour – and it saves you trips to the shops to buy cartridges.”

The solar power industry has realised the service model makes more sense than selling panels as a one-off deal. Consumers just don’t have the cash to pay up-front. Origin Energy offers solar-as-a-service. There’s no up-front fee. Consumers switch to Origin and get locked in to an energy fee which is lower than their current average bill. Installation of the solar panels, plus maintenance, is paid for and managed by the supplier.

The IT sector is sold on servitisation. Adobe made the switch in 2012, with the introduction of the Creative Suite subscription for products including Photoshop and Illustrator. Computer-aided design software maker Autodesk has moved to a subscription model. Asif Moghal, UK manufacturing industry manager, reports the move dramatically lowers the traditional cost barriers to entry while providing access to advanced design tools in a highly scalable way. He says: “We believe that’s where the industry as a whole is heading, especially with the advent of speedy internet and unlimited cloud storage.”

At Cranfield University, where manufacturers come to learn the art of servitisation, course director Professor Ian Jennions says companies that ignore the trend will probably go out of business. He’s helped the likes of Triumph Motorbikes, Babcock, and train companies all grasp the nuances of servitisation. But not all do. He warns: “Some are like Kodak in the age of digital photography.”

Manufacturers love to talk about innovative products. But the truth is that today the biggest improvement a manufacturer can make is not the product, but the way it’s sold.

Servitisation is a win-win

Tim Murdoch, director of digital services at Cambridge Consultants, outlines why servitisation is a success.

“Pretty simply, assets work better when properly looked after,” he says. “That tends to get a bit lost in the discussion about innovative new business models. But for those who keep the focus on this primary purpose, the business is there – whichever model they choose.

“With servitisation the original equipment manufacturers really know about both the state of the asset and how it is being used. This allows them to take some risk in its operation; the prize they are after is to gain some of the upside of their customer’s business. In return, the operator hands off some risk while at the same time hoping for greater utilisation through better maintenance. Both businesses are able to focus on what they are good at. It’s a win-win.

“The billing structure is just a way to make this work and is typically a midway house between manufacturer and operator, with an initial capital outlay matching the cost structure of the manufacturer and then an ongoing operational fee matching the income of the operator. Much of this is a consequence of a much more competitive and dynamic global market, which makes these costs and revenues pretty transparent to all parties.

“The closer the manufacturer gets to their client’s business, the more they see opportunities to build better products, often in real time and with deep insight through the vast volumes of data servitisation generates, which added to the competitive nature of their business means quicker product improvement. This means operational data scientists are fast becoming the most valuable part of a manufacturer’s design office.”