Cambridge Service Alliance Blog
The focus was put on four providers of complex relational services, such as performance-based contracts that guarantee product availability. The research has shown that the conception of the product orientated innovation process (company innovates- company sells – customer uses) doesn’t hold in the relational services, where the customer’s involvement in co-creating the service is accentuated. That means that the new services development is simultaneous to their production and use, thus making the customer a co-creator of the service. Firms that prepare properly for these two characteristics – simultaneity and co-creation – before engaging in relational service provision are likely to be more successful.
The service contract is designed, contracted for and then delivered by the service provider on the basis of the outcome that the customer wants. The service is innovative when the service provider offers a new outcome- an outcome he never provided before. The innovation actually takes place through interaction of the service provider and the client, making them co-creators of the service through the delivery.
Risk and reward in service innovation have a different nature as well. Although the service provider may invest in the infrastructure necessary to provide the new service, through payment of service fees the client effectively co-finances the innovation process. As customer signs a long-term contract, the service provider avoids the market risk. But the service provider must address the risks inherent in delivering a novel service, whether these are higher service costs, contract penalties, loss of profits, or a dented reputation.
Problems with initial service delivery might cause the company to withdraw from the innovation. This actually disables it to understand the lessons from the initial innovation and reap the benefits that accrue over time through additional services to existing and new clients. The potential benefits for the service provider include: first-mover advantage, enabling the firm to leverage its learning by using it to secure further contracts with existing or new clients; cross leveraging innovation infrastructure investments and learning across other service contracts; and using the initial service innovation as a catalyst for other types of innovation –both services and products.
Firms that wish to be good service innovators need to have cross-functional teams and company-wide incentives to innovate, in other words an organizational-wide entrepreneurial culture should be encouraged throughout the company. This stresses how crucial adopting a long-term approach to innovative services is. The client and the service provider have to have a long-lasting, mutually trusting relationship in order to capture the full benefits of the innovation. They have to be well acquainted with one another in order to overcome the initial problems.
Research Lead, Cambridge Service Alliance
Online profiles on social networking platforms such as LinkedIn and Facebook have powerfully altered the way we network and build relationships with colleagues and work partners. Paradoxically, the intensification of competitive pressures in business resulting from the information age is accompanied by an opposite phenomenon, of distributing help more willingly to connect people to a wider group than ever before.
It is not new that people from the same circles help each other out, be it to find a job or share access to new opportunities. Now, as social circles expand to their widest through social networks, the definition of “friends” is also influencing who we are willing to help, in the expectation of a returned favour later on in life. Every new encounter is perceived as a potential resource for a future time, and comes with positive expectations.
People who belong to the same network are most likely to be competing for the same job or the same promotion at some stage in life or another. Yet the members of a common online social network are inclined to think of themselves as “friends” or connections that they want to help out. In the academic jargon of social networks, online contacts serve as “brokers”, people who may introduce or refer one another to a contact or for a position. Sometimes, this happens between people who may never have met each other in person. A few connections in common or a few keywords may be enough.
Online profiles expose our social networks to everyone. The effect is partly to show how well-connected we are, a well-recognised measure of “strength” or social capital in the business world (Kilduff et al., 2011, Inkpen & Tsang, 2005). But the collateral is that sharing our network to friends and colleagues, opens up the same resource to them. Is the power of social media to have instituted a silent etiquette, of never to refuse an introduction?
Meantime, in the physical world, shrinking developed economies mean increasing competition for every single job position. In investment banks, 2000 applications get narrowed down to 30 new hires. In less structured professional environments such as entrepreneurship and business, fewer and fewer new technologies or new ideas ever turn into profit. Competition wipes out small and large companies every day, products become obsolete ever faster, and entire industries disappear overnight. So, is online social “brokerage” leading to a more efficient matching of human resources and work, or is it enabling the identification and selection of the very best and very few for the over-subscribed opportunities?
The first to say is that I don't think "servitization" is a business model - instead I see servitization as a transformation journey. Servitization is concerned with building the organisational capabilities and processes required to design, deliver and innovate high-performance product-service solutions. A business model is slightly different - it defines how you create and capture value through appropriate value propositions and delivery systems that operate within a broader ecosystem. A good business model also considers the risk or accountability spread that your organisation is exposed to through this combination of value proposition, value delivery system and ecosystem evolution.
Having said this, I understand the point behind the question, namely what business model options do manufacturing firms face post servitization? I'd break my answer to this question into two parts. First, I would think about the elements of the business model and ask what scope is there for change in terms of: (i) the value proposition; (ii) the value delivery system; (iii) accountability spread; and (iv) the ecosystem. Second, I'd think about whether there may be radically different business models at the aggregate level. The answer to the second question is relatively short, so I'll start with this one and simply say "I think its unlikely that we'll see radically different generic business models". Indeed one could argue that today's seemingly different business models are a rehash of old models. Take, for example, business that make money by attracting eyeballs and selling advertising - Google, Facebook, etc. Well TVs and newspapers have been doing that for years. The medium is different, but the base business model is the same.
So let me move to the more detailed level. Here I think we will see innovation - particularly in terms of the value delivery system; the accountability spread and the ecosystem. When it comes to value propositions I think most people understand the shift to outcomes - that organisations have to think clearly about what outcomes their customers really want and how they can then deliver these outcomes, rather than products or services. Where there's scope for innovation is in the value delivery system. Increasingly technology is playing a role in allowing organisations to innovate the way they configure the resources they use to deliver their products and services. Remote asset monitoring and diagnosis - using sensors and satellite infrastructure to monitor assets in the field and then diagnose potential maintenance requirements is becoming more widespread. In the education world, remotely monitoring student progress through online courses and intervening only when students seem to be going off track, allows schools and universities to focus teacher and faculty time on those students who most need support. Remote health monitoring technologies are revolutionising medicine and healthcare. Wearable devices can monitor the vital signs of individual patients letting doctors and hospitals intervene only when necessary. In essence the first wave of business model innovation we are seeing concerns innovations in the value delivery system - looking for new ways of combining and configuring resources to ensure value is delivered to customers as efficiently as possible.
The second theme we'll see is a greater understanding of the risk and associated accountability spread. As organisations innovate their business models and take responsibility for outcomes they also take on risk. As they innovate their value delivery systems, often partnering with others, they reduce their own level of control. Both of these activities increase the risk or exposure of the contracting organisation. Too often today organisations cope with this increased risk and exposure by increasing their prices (and hence safety margins). Technology will help organisations get a better handle on the risks they really face and how these risks can be mitigated and as a consequence we'll get more sophisticated about how we price risk.
The third and final theme we'll see is greater innovation at the level of the ecosystem. Competition won't solely focus on your direct competitors. Instead firms will explore what role they should play in the broader ecosystem and how they can shape the ecosystem. Apple is one of my favourite examples here. By opening up the technology required to develop apps, Apple has encouraged a community of apps developers. If you have a large community of apps developers then you get lots of cheap apps - the individual apps end up competing on price as there's always a similar app to yours on offer. So the hardware - the iPad, iPod and Mac - becomes more valuable because it is the route to access lots of cheap Apps. When it comes to business model innovation we'll see more and more firms thinking this way - how do we shape the ecosystem to help us better create and capture value.
So back to the original question - "what is your prediction for the next revolutionary business model after the servitization of manufacturing". The short answer is that I don't believe we'll see radically new business models, but I do think we'll see radical innovations in the elements that make up business models - particularly in terms of the the value delivery systems, the accountability spread and the broader ecosystem.
In a previous blog I talked about the reasons why firms servitize. One important reason is the installed base - the ratio of new product sales to installed equipment. In mature industries these ratios can be significant. Figures often quoted include an installed base of 13:1 for cars, 15:1 for civilian aircraft and 22:1 for trains. That is for every new train sold, 22 are already in operation and available for service and support. Consider that trains have a working life of between twenty and thirty years and you can see why the installed base offers a significant business opportunity. Indeed in many sectors, the rule of thumb used is that a product will consume 3-4 times its original purchase value through its operating life in terms of spares and consumables. So a $1 million dollar piece of construction equipment will consume between $3-4 million in consumables and spares over its thirty year operating life.
Researchers at the Cambridge Service Alliance have recently been looking at the installed based, seeing what data we can gather to understand the size of the installed base in different sectors. Our preliminary analysis suggests that the traditionally quoted figures underplay the size of the installed base in some sectors, especially aerospace. Take, for example, US aerospace - in 1995 there were 212,000 US aircraft in operation (both military and civil). In the same year 2,441 new aircraft were shipped, giving an installed base ratio of 87:1. By 2005 there were 246,000 US aircraft in operation, with 5,426 new aircraft shipped, giving an installed base ratio of 53:1.
While both figures (87:1 and 53:1) are considerably higher than the figure traditional quoted (15:1), the reduction in the ratio is interesting. One might expect that the installed base ratio would increase over time. New products are sold at a rate that is faster than old products are retired, but in the case of aerospace, underlying market growth has a significant impact. The number of new civil aircraft sold per year, for example, effectively doubled between 1995 and 2005, and it is this market growth (in civil aircraft) that brings down the installed base ratio. Even so, an installed base ratio of 53:1 highlights the significant opportunity that exists.
The story in the automotive sector is rather different. Here we see slight growth in the installed base ratio between 2003-2008, from 13.5:1 in 2003 up to 14.7:1 in 2008. This growth is driven by an increase in the installed base of passenger vehicles, with 13 million new vehicles being registered in Europe in 2008 and 198 million in operation. A key issue in the passenger vehicle market is the rate of retirement of existing products. Given the relative maturity of this sector, new cars are often replacements for existing cars and so as new sales are secured, old cars are retired. For this reason it is unlikely that we'll see significant growth in the automotive sector in the installed base unless product life cycles increase and/or consumers decide to reduce the rate at which they replace their cars.
So this brief analysis suggests three issues to consider; (i) understanding the size and potential of the installed base matters; (ii) in some sectors the installed base ratio will not change significantly, as the market matures and product replacement becomes the predominant reason for new product sales; and (iii) significant market growth can reduce the installed base ratio, although even so the installed base can be an attractive market segment.
- a skill set capable of extending the relationship with the broad client base;
- the capability to develop sophisticated service offerings that provide better coverage of customers’ needs; and
- the ability to offer all the services efficiently.
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.
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:
- 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.
- 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.
- Data capture, sharing and standards. Improving the quality and availability of the information available for decision making.
- Predictive analytics. New information technologies are available to improve Asset Management, but several barriers prevent their effective use.
'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:
- 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.
- 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.
- Managing inherent risks. Taking responsibility for outcomes involves risk which must be recognised, accepted and carefully managed.
- 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.
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.
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?
What does the future hold for services? I was recently invited to give a talk on this topic and gazing into a crystal ball produced five predictions...
1. Services will become more automated, but automation will brings risk...
Clearly technology will play an increasingly important role in services. RFID tags and barcodes on installed products will store service and parts histories - no need to search for those old service records anymore. Social media and unstructured data will be used to guide service interventions. The city of Chicago, for example, is seeking to harvest Twitter data to identify potential problems with public infrastructure. Weblogs, loyalty cards, smart phones - coupled with position location trackers - provide valuable data that can be used to tailor and customise services.
Yet this increasingly interconnected world also brings new risks, particularly as organisation join data up across domains. Think of your local convenience store and the loyalty card data they collect. How happy would you be if they started selling data on your shopping habits to your health insurance providers? The automation of services will increase their efficiency, but firms will have to consider very carefully the ethical and morale implications of how they use data they can access.
2. Services will become more localised and personalised...
Technology is already enabling the localisation and personalisation of services. Couple these developments with environmental drivers, such as the cost of carbon, and we'll see an even great shift towards localisation and personalisation. Take 3-D printing – in the future we’ll have printers in our homes that can create incredibly complex products (things that can’t currently be manufactured). 3-D printing will revolutionise manufacturing, but it will also revolutionise the spares market – what will you do do when customers can 3-D print their own spares to order?
3. Health services will be massive...
The demographic changes that are afoot will have profound implications for healthcare – already pharmaceutical firms are redefining themselves as healthcare businesses. As their drugs come off patent, they are realising that they have to change their business model, reinventing themselves as healthcare solutions providers. A much more customer focussed approach - most of us don't want to take medicines, we want to be healthy in the first place. So if you can be the healthcare solutions provider that stops people getting ill you are in a powerful position. In healthcare, its not just the changing nature of the economic environment that matters. The ageing population will also stress the medical system – many countries won’t have enough capacity (beds) in hospitals for the potential demand and it is too costly to keep people in hospitals anyway. So Governments will look for alternative forms of healthcare provision, e.g. assisted living, where people remain at home and are remotely monitored, perhaps using biometric monitoring devices built into their clothing.
Then there’s the question of healthcare diagnostics – IBM's Watson, the software solution that won Jeopardy, is now being put to use in healthcare, supporting doctors in patient diagnosis. And the potential for new healthcare services does not end their. Will we see organ farms – farms where people grow replacement body organs that are sold on the open market?
4. Everything that can be digitised will be...
Digitisation is already a significant trend in some sectors - take books, music, films… When will we stop producing physical version of products that can be made available as electronic services? Will we stop producing cash – we can use electronic credits on our mobile phones – indeed M-Pesa already does! When will virtual holidays become the norm – augmented reality means we can take a Carribean cruise without leaving our house – we certainly won’t need to fly miles in an aeroplane…
5. We'll stop being consumers...
The growing pressure on the earth’s resources will make “consumers” outlaws… We won’t be pleased to be called a consumer – instead we’ll look for ways of sharing resources and physical assets. We won’t all own our car, our own washing machine, our own lawn mower… Instead we’ll share resources across neighbourhoods. Do we really need watches? Our digital devices (whatever comes after the iPhone) can tell the time, double as a TV, etc, etc.
A global recession need not mean firms have to contract. Instead, they might like to consider what we at the Cambridge Service Alliance call ‘the challenges of selling services’. We know that in a global recession there is more demand for firms to be innovative. People are asking themselves: ‘How do we deliver the outcomes we want?’ They are not just going to continue carrying on with business as usual. What we advise firms to do is to ask the question: ‘What is the outcome the client is trying to achieve and how can we innovate the service delivery model to achieve that outcome?’
The shift to services is about the tendency of firms not just to sell products, but instead to sell outcomes - the outcomes that are related to services. For instance, a train manufacturer might in the past have sold trains, and then decided to provide the through life service to look after that train for its entire life. But today they are now going further. They are saying that customers don’t even need to buy the train, as they will guarantee the availability of the train. They will maintain it and they will look after its upkeep, so that customers can just use the train. Ultimately customers often don’t want to own products, they want the service the product delivers for them.
There is little doubt that the shift to services does open up the market place; it creates new opportunities to grow revenue. But we do understand that it’s also not a straightforward change for firms - some of the changes are around changing mind-sets, and changing the culture inside the organisation, particularly for manufacturing firms. If you have been really good at making products and then you decide to move into servicing products as well, throughout their life, then clearly you are going to need people with different skill sets. You will need closer relationships with customers. You will have to help the organisation evolve and start to change the culture so that your firm becomes much more service oriented.
In the world of service many people talk about the co-creation of value - the idea that customers and providers work together to create value in service. Take, for example, a restaurant. As a patron you and your companions (assuming you are not eating alone) help create the experience. You engage in conversation. You banter with the waiters. You compare and often share your food. In a more complex business-to-business setting, the provider of the service is often dependent on customer inputs. When maintaining complex engineered equipment, for example, customer feedback - what's working, what's not - is an essential input to the maintenance diagnosis process.
I have spent the last couple of days at the launch meeting of the NEMODE - New Economic Models in the Digital Economy - network. One of the most interesting themes to emerge for me was the idea of the co-evolution of business models, rather than the co-creation of value. An apposite example is provided by eBay. When eBay was first launched it was created as a market place for selling cheap, second-hand goods. The idea was that you could go to your garage, find an old set of tools, put them on eBay - a form of electronic car boot sale - and sell them, rather than trash them.
Over the years eBay has evolved - it has become a virtual market place. People use it to sell everything - from second hand garage items to new cars. Some use eBay as virtual store, selling their goods online. What has happened over the years is the users of eBay have found ways of using the platform that were never originally envisaged. As the users have innovated their use of the platform, eBay has responded and innovated its business model.
Co-evolution doesn't rest there - it is not just the interaction of customers and providers. You also have to consider the broader eco-system. Take, for example, Apple. Through the Apps store and through Apps themselves, Apple have created a platform that allows others to offer services (Apps) to customers. The three parties involved - Apps developers, Apple and the customers - are jointly co-evolving the business model. This raises an interesting question - how good are you are co-evolving your business model with your customers? Have you created a platform that allows the customers to find new ways of creating value? And if so, are you capable of spotting these customer innovations and incorporating them into your business model to allow the next round of co-evolution?
How many organisations actively think about the nudges they are introducing when designing services? How many organisations train their service designers as choice architects - encouraging them to think about the behavioural implications of seemingly trivial design choices? My guess is not many. Test it yourself. When you next experience a service, look for those nudges and see how many really nudge you in the right direction.
I saw a linked piece in the UK's Guardian travel supplement recently. This time focusing on the innovation festivals that are sprouting up all over the world. Clearly the best known innovation event is TED (Technology, Entertainment and Design), but TED has sprouted a load of local TEDx events (independently organised TED events). I liked the Guardian article because it introduced a range of other innovation festivals, including Wisdom 2.0 in California, South by South West in Austin Texas, The Do lectures in Wales, 99% Conference in New York, Future Everything in Manchester, Likeminds in Devon, Vivid Sydney in Australia, North by North East in Toronto Canada and the unsubtly named World Domination Summit in Portland.
Its fascinating that social media, coupled with networking events are bringing people together simply to enjoy one another's company as they create new service ideas. Where does that leave service deign in organisations? If you have armies of volunteers offering their time and thoughts freely to one another, how do organisations compete with the collective wisdom of the crowd? In fact one could ask whether organisations should compete - maybe the time for open service innovation is upon us.
Andy Neely, Director Cambridge Service Alliance
There’s much talk of the servitization of manufacturing – supplementing products with services. The most recent data suggests that some 70% of economic activity lies in the service sector. Yet this figure ignores the significant proportion of service within the traditional manufacturing sector. Capital intense manufacturing firms, like BAE Systems and Rolls Royce, now generate over 50% of their revenues from service and support. Others, such as the oil majors have vertically integrated, offering downstream retail services, as well as upstream extraction operations. The shift to services seems inexorable and pervades many walks of life, but is it for you?
In answering this question there are some basic issues to consider. The first is quite simply are you selling a product that people want or need to own? Some products are consumed during use – think of food or fireworks. Your customer has to take ownership of these products, as they are used during the consumption process and have no resale value after they have been used. Other products are aspirational – products that customers don't need to own, but that they choose to own because of the value the product confers. We don’t need expensive cars to take us from A to B, or expensive watches to tell the time, but some people choose to spend their money on these luxury purchases because of the status ownership of the product confers.
Clearly there is scope to offer services associated with both consumed products and aspirational products. Restaurants are service and they use food as an input. Suppliers can offer to automatically restock restaurant supplies, an inventory management service, associated with food stocks. Some businesses choose to rent or lease aspirational products – luxury cars and even designer watches. In fact it is almost impossible to define a product that cannot be accompanied by a service. The question is where does the value lie. And can the service be delivered efficiently enough to generate a decent return.
For more detail on the shift to services see the Cambridge Service Alliance report – The Servitization of Manufacturing: Further Evidence