Economic constraints and the need for constant reliability have created a new industry within manufacturing – servitisation. Professor Tim Baines of Aston Business School explains
Manufacturing and service industries are often seen as largely independent. Whether discussing national economies, business classifications, education, training or employment, they tend to be thought of as separate activities.
Yet manufacturers themselves can base their competitive strategies on providing services. The process through which this is achieved is commonly known as servitisation.
Icons in this world are companies such as Rolls-Royce, Xerox and Alstom. These all offer advanced services incorporating maintenance, repair and overhaul contracts where revenue generation is directly linked to asset availability, reliability and performance. The commercial benefits of servitisation are convincing, the environmental arguments are compelling and the opportunities immense.
But how popular is servitisation in industry today, and how relevant is the concept beyond a few large organisations?
Haigh Engineering helps to demonstrate that servitisation is not just for big corporations producing large and complex products. Located in the West Midlands and employing around 100 people, the company manufactures maceration machines and waste separation systems for the waste water sector.
Over the past year they have moved away from just selling their equipment, to offering performance-based lease agreements.
These incorporate proactive maintenance, equipment upgrades and a monthly payment plan, with development of web-enabled remote monitoring now underway.
Haigh is already seeing the benefits of services. “This is a significant opportunity for us to deliver benefits to our customers and enhance revenue; since the start of the year our revenues from service and spares have already gone up by 25-30 per cent,” says managing director Mark Brian.
Manufacturers can base their competitive strategies on providing services
Waste Spectrum is smaller still. With just 35 employees, they manufacture incinerator machines that provide bio-secure disposal of animal carcasses and medical waste. Similar to Haigh, they are moving away from transactional sales to longer-term service contracts typically lasting five years.
These contracts offer guarantees to customers based around equipment availability and reliability, along with capped maintenance costs and monthly payment plans. Again the benefits have been dramatic, with revenue from services set to exceed 20 per cent of turnover from almost a standing start in 2013.
Neil Rossiter, managing director, captures the situation well. “Just being an OEM [original equipment manufacturer] isn’t it anymore; it’s not enough. People want service, and they want support and they want back-up,” he says.
Malvern Scientific provides still further evidence that servitisation is generic. By comparison this is a micro-company, only employing eight people in rural Worcestershire. The business focuses on the design and production of technologies that assist people with disabilities. In particular, the company specialises in computer-based systems that help people with severely limited mobility to carry out word processing, access the web, send e-mails and other IT-based activities.
Up until recently, Malvern Scientific has set out to do business by trying to sell these systems to its customers as a conventional transaction. However, the competition is tough, with the market dominated by three large north-American companies who sell similar technologies.
Their breakthrough into services has come about through conducting audits of the technology needs of disabled people. Initially this was simply a means to win extra revenue, but in doing so they realised that users frequently failed to get the value from the systems they purchased. All too often, expensive equipment was unused, perhaps because of a simple fault or lack of adequate training and support.
Malvern Scientific has used this knowledge to develop an innovative services contract, based around the monthly rental of their technologies and support delivered by occupational therapists. To deliver this they have created a new offshoot, Assistive Control, which directly employs only two people. The company hopes to achieve 70 per cent of revenue from this service alone.
Despite such examples, our understanding of servitisation is still in its infancy. The benefits are becoming clearer, both for manufacturers and their customers, although these are better documented for the larger companies.
Manufacturers benefit from improved commercial resilience. This is achieved because services better position manufacturers to respond to the demands of their customers and, in doing so, prevent competitors from gaining a foothold in their markets. Alstom Power illustrates this: “… once a third party’s into one of our machines here, they can possibly attack around the world and that’s what we try and stop with these contracts”.
Servitisation also benefits growth. Improved customer intimacy leads to opportunities for new services. For example, Rolls-Royce services, such as TotalCare, have helped support the creation of low-cost airline operators because the emphasis on maintaining the product is with the OEMs.
Customers benefit through reduced financial risk and improved asset management. Hoyer, a logistics company based in Yorkshire, has adopted a pay-as-you-go system with MAN trucks. Costs are based on per mile driven and this helps to ensure they only incur expense when they are generating revenue. In addition, MAN have innovated their services to offer driver training that helps to improve the fuel consumption of their trucks. They report that these services have enabled many of their customers to improved fuel consumption by at least 10 per cent and reduced CO2 emissions by 10-15 per cent.
Additional benefits for customers include improved focus and investment. British Airways, a customer of Xerox, saw their document management services as taking away “pain” in its operations and enabling them to focus on the core business of being an airline. This has helped them improve their competitiveness through improved service quality to customers.
Similarly, Alstom Transport described how rail passenger numbers on the West Coast mainline was fewer than on the East Coast when Virgin and partners took it over. Today it is twice the size of the East Coast line because of the improved standards of rail travel and there are now up to 32 million passengers a year.
And for an economy, a gross benefit is a localisation of value capture. The small manufacturing companies mentioned here have, through their services strategies, collectively contributed around £2 million of gross value add to the West Midlands economy in just over a year.
Although minuscule compared to a multinational, such as Jaguar Land Rover, remember there are around 3,000 such small and medium-sized enterprises in the West Midlands alone. The potential opportunity is immense, the challenge is to explain, encourage and guide the adoption of servitisation. Not an insignificant task.