Aston business school servitization impact study 2013


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As the U.K. economy begins to return to modest growth, a new report finds manufacturers that incorporate useful services with their existing products are realising business growth of 5 to 10 per cent a year. This is the chief finding from a 12-month research project carried out with nearly 30 British manufacturers and their customers1 by Xerox and Aston University.

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Aston business school servitization impact study 2013

  1. 1. Servitization impact study:How UK based manufacturing organisationsare transforming themselves to competethrough advanced services
  2. 2. 2Executive summaryAccording to media reporting on government data the UK manufacturing base is on its knees.Negative stories about falling production levels and employment, the balance of payments andoverall GDP suggest that the outlook for this sector is a gloomy one. After the passing of BaronessMargaret Thatcher, the news cycle around this issue has only intensified. However a very differentstory is running in parallel to this which could change manufacturing’s complexion entirely. A new andalternative services sector is evolving which is rooted in technological competences of manufacturing.This is showing strong growth opportunities, with a number of companies exploiting this strategy tocreate new and resilient revenue streams. This interplay between manufacturing and services may notbe immediately apparent but, in truth, they are already coming together in a way that is re-shaping thefuture of UK manufacturing. It’s a process identified in this report as Servitization.What is servitization?Servitization is the concept ofmanufacturers offering services tightlycoupled to their products. It’s aboutmoving from a transactional (just sell aproduct) to a relationship based businessmodel (delivering a capability) featuringlong-term, incentivized, ‘pay-as-you-go’contracts. Examples include Rolls-Royceoffering TotalCare on gas turbines for theirairline customers based on a ‘fixed dollarper flying hour’; Xerox delivering ‘pay-per-click’ scanning, copying and printingof documents; and Alstom Train-LifeServices supporting Virgin by assuring theavailability, reliability and performance oftheir Pendolino trains on the West CoastMainline.
  3. 3. 31 The index of manufacturing fell by 1.4% in February 2013 when compared with February 2012.,as published by the Office for National Statistics’ ‘Index of Production 2013’After speaking to 33 key executives from 28 leading organisations that have ‘servitized’, we have identified four key findings:1. Servitization promises sustained annual business growth of 5-10%. The services model triggers product and processinnovations, powered by technology, which results in significant year-on-year growth with both new and existing customers.In time, with maturity, this diversification impacts on business resilience, with revenues from products/services typically split50/50.2. Customers of Servitization are reducing costs by up to 25-30%. Leading adopters of technology-led services arelowering their own costs while driving business growth in their own services to their customers. Companies that have becomecustomers of Servitization have also been able to improve their financial structure, risk profiles and efficiencies around assetmanagement.3. Servitization can deliver resilience and growth to the UK economy. Using technology to drive new service offeringsgives manufacturers a new commercial viability to exploit, and offers significant potential for both the regional and macro-economies. Services are bringing them closer to their customers, building high entry barriers for competitors, and positivelyimpacting environmental sustainability.4. Adoption is inhibited by a lack of awareness. The promises of Servitization are fragile, and need to be nurtured whileour understanding develops. Businesses and policy-makers must therefore help create a shift in culture, creating the skills;contracting structures; governance; risk management mechanisms and financing systems that will allow companies to deliverservices while building their capabilities to innovate technology along the way.The servitization model offers an ‘alternative way’ forindustrial strategy in the UK. Industrial operation is becomingincreasingly sophisticated and services should no longerbe treated with the ‘either-or’ logic of the past, rather asan addition to existing practices. As a means of competingwith cheaper overseas production costs it may be vital tothe future of UK manufacturing. But a shift in mind-set,organisational structures and operations is certainly required,and this extends to the way in which GDP statistics arecollected and reported. This is to facilitate a move away fromthe over simplistic view the reported statistics portray that‘manufacturers make things and services do things for us’.If properly embraced, servitization can create longer termrelationships between suppliers and customers, built on trustand delivering more balanced and sustainable growth acrossthe UK economy. But with growth in the manufacturing sectoralmost stagnant1and even the long-term competitiveness ofservices being questioned, the time to act is now.
  4. 4. 4ContentsIntroduction 5About our methodology 6The Xerox story 7Servitization and technology-enabled services 8Technology innovators as services providers 8Advanced technology-enabled services 8Features coupled to advanced technology-enabled services. 8Customer engagement with advanced services 9Transformation: moving from a product to a services focus 10Origins of services strategies 10Early drivers of servitization 10Table 1: Early drivers of service strategies 11Organisational change within the OEM 12Services strategy benefits 14Benefits; realisation of early drivers 14Table 2: Benefits of service strategies 14Benefits; beyond early drivers 14Table 3: Impact on business performance through service strategies 16Quantifying impact 17Business trade-offs 17Enablers and inhibitors of service adoption 18Inhibitors within customers 18Enablers within customers 18Inhibitors within manufacturers 18Enablers within manufacturers 20Table 4: Enablers and Inhibitors of service strategies 19Potential for UK business and economy 21Concluding remarks 22Appendix: The expert panel 23
  5. 5. 5IntroductionWith the passing of Baroness Margaret Thatcher, we continue to debate intensely the rights andwrongs of favouring a service sector in the UK over manufacturing, and the desirable balance in theeconomy. But our arguments are based on shaky foundations; original equipment manufacturers(OEMs) are themselves transforming into services providers and so blurring our perspective. Thisphenomenon is becoming apparent across all industry in the UK.The business community is struggling to give a name to thistransformation. In this paper we use the term servitization2to embrace the increasing importance of technology-enabled services offered by OEMs. This term originates inmarketing research of the 1980s and 90s, and has broadacceptance amongst engineering and business researchers.Servitization is an evolution in our ideas about manufacturing;it extends our definitions beyond production and factories,and represents those OEMs who are following a services-ledcompetitive strategy and business philosophy. Here, we usethe term manufacturing very broadly, to represent all types oforganisations with ‘technology-innovation’ capabilities at theircore, whether they are large producers of physical assets(e.g. Alstom with both power generation and trains,Rolls-Royce with gas turbines, MAN with trucks, HCL withIT services in a managed service model) or smaller businessesproducing less tangible products (e.g. software delivered viathe Cloud, or ‘software as a service’).The adoption and impact of servitization within the UKeconomy have yet to be understood. Our aim in this studyhas therefore been to explore: how servitization takes placein practice; the drivers, benefits, enablers and inhibitors ofservitizing; and the impact upon the industrial landscape inthe UK. This is a complex topic to study. Convention favoursbroad surveys using production-centric metrics (productionlevels, employment etc.) but such an approach would notaccurately reflect how services business models shapeorganisational performance (commercial viability, customerexperience, value for money). In this study we have thereforechosen a Delphi research methodology to capture evidenceand opinion from 33 senior executives, in 28 different sizedorganisations, from a cross section of UK industry.In developing this paper we have set out to build theevidence base underpinning servitization. While reliable andrelevant metrics are elusive, there is a growing body of seniorexecutives who are willing to explain their experiences. Itis these experiences that we have brought forward in thispaper, providing examples and quotations throughout thatdemonstrate that the findings we put forward are formed onevidence from industry. We focus on five areas:• Servitization and technology-enabled services • Transformation: moving from a product to a services focus • Impact on the customer and manufacturer • Enablers and inhibitors • Potential for UK business and the economy Our intention is that this paper should explain the conceptof servitization and develop a story that reflects how OEMsthemselves are affected. In order to illustrate the businesstransformation on which we focus, we first summarise thetransformation of Xerox.2 For a fuller description of this topic see: Made-to-serve; how manufacturers can compete throughservitization and product-service systems. Baines and Lightfoot, 2013, Published by Wiley.
  6. 6. 6About our methodologyServitization is a challenging topic to study; nuances can be easily misunderstood and often requirecareful explanation. In order to gain a reliable insight into practice, we followed a Delphi researchmethodology; a systematic and interactive investigation structured around a panel of experts. Eachpanel member was interviewed for between one and three hours, using a set of research questions.The conversations were recorded, transcribed, coded andanalysed by the research team to find common themes. Adraft report was created and circulated amongst the expertsto check accuracy and ensure their views were captured infull, and the interviewees were encouraged to review theirearlier answers in light of the replies of other members of thepanel. A second round of interviews then followed, with theresponses helping to shape the final revisions to the paper.The expert panel comprised senior executives from a range of28 organisations in the UK. These organisations were chosenbecause they were either businesses with a manufacturingheritage that had implemented a services-led competitivestrategy successfully, or customers that had adopted servicesfrom such organisations successfully. Collectively theseexecutives provided insights across the sectors of health,infrastructure, transport and energy (see appendix 1).Throughout this study the Aston research team partneredwith Xerox. This organisation has a long heritage of deliveringadvanced services coupled to its equipment, and this yeargenerated over half of its revenue from such services. Incelebration of this achievement Xerox staff helped with thedesign of this study to ensure that the outcomes were directlyrelevant to industry. In true partnership style, the Xerox team(Zachary Emmett, Sonia Panchal and Tim Pearce) respectedfully the autonomy and independence of the Aston researchteam (Tim Baines, Gill Holmes, Patrick Keen, HowardLightfoot, Iain McKechnie and Eleanor Musson).
  7. 7. 7The Xerox storySince the invention of Xerography 75 years ago, the people of Xerox have helped businesses simplifythe way work gets done. Today they lead in business process and document management.Looking to the future, people are increasingly mobile, digitallyliterate and ‘green’. This is shaping how users approachdocuments and print. ‘Information overload’ is diminishingtheir effectiveness and that of the organisations they workfor. They need help to stay competitive. Yet paper’s role inbusiness remains important: it is still the process and systemsintegrator, connecting people with business systems. Itsoperational role needs to be understood by getting insightsinto customers’ operations. Emerging technologies thatXerox has a hand in developing can be used to understandlanguages, analyse images and route data to help processescross the ‘paper-digital divide’. Automation techniques can beused to streamline paper’s use inside business processes: toincrease business velocity as well as reduce costs. Ultimatelyprocesses can be completely outsourced by routing theworkflow to a workflow to a Business Process Outsourcing(BPO) provider. All activities Xerox can support today.Constant changes in technology and work habits will alwayslead the business world to places yet to be explored. Nomatter where business goes, Xerox will be working to ‘makeoffice work a little simpler, a little less tedious and a little moreproductive’.Xerox’s founder, Chester Carlson, was a patent lawyerand had to deal with composing many copies of the samedocument by hand. He focused on inventing technology –‘dry writing’ – to turn this arduous task into a simple businessprocess. His intent was to “make office work a little simpler, alittle less tedious and a little more productive”. After enjoyingan early dominance in the business market that today equatesto companies like Google’s juggernaut, Xerox has seen its fairshare of obstacles to overcome. There was fierce competitionfrom the Japanese in the 1970’s; Apple’s use of Xeroxtechnology in the 1980’s; and a ‘near death’ and turnaroundat the start of the millennium. And now – today – digitaltechnologies are changing the way people work. Through it all,the company’s focus has always been on the customer andcreating innovative technologies to help them get their workdone. Xerox started looking at the printing environment froma holistic perspective rather than assuming that customerssimply wanted cheaper equipment and supplies. The drivewas to provide services that would gain control over allaspects of their printing, and the result was the creation ofManaged Print Services (MPS).The company continued to develop capabilities in documentmanagement (an industry it created), business process andinformation technology outsourcing. In 2010 it acquiredAffiliated Computer Services, the largest independentbusiness process outsourcer in the United States. This nowmeans Xerox can focus on and transform the back-officeoperations of businesses and governments: for examplein HR, customer care and finance. It provides shared scaleand access to expertise to make these operations moreproductive, reliable and sustainable. Service provision hasbeen a financial success for the company. In 2012, 84%of Xerox’s $22.4 billion revenue was annuity based, withservices revenue growing 6% from 2011, to $11.5 billion.The company has grown from its origins of delivering on-site,small scale contracts to become a professional shared serviceorganisation delivering substantial outsourcing contracts to itscustomers, underpinned by its own technology.
  8. 8. 8Servitization and technology-enabledservicesAt the outset we sought to explain how OEMs actually compete through services. What is particularabout these organisations? What types of services are they offering? What are the features of these?And, how might a customer adopt these services? The following outlines the picture that emergedfrom the’ to customers. This means that for a typicalcustomer, such as BA, Xerox provides:‘Project management, implementation of all thenew technology or the new workflow, through toproviding the hardware. They’re managing thirdparties that they’re interfacing with, companieslike the Royal Mail and courier companies on ourbehalf.’There are various types of advanced services that can beoffered, and a wide variety of terms is used across industryto describe these (e.g. availability contracting, performancecontracting, managed services, solutions). However theoutcome of these contracts is, invariably, a capability for acustomer to perform a business function or process. This isdistinct from more conventional services where the outcome isproduct ownership and maintenance of an asset’s condition.Features coupled to advanced technology-enabled services.Confusion arises because particular contracting featuresare often coupled to advanced services. There are four keyfeatures; the first three of these are relatively widespread:• Pay-for-use revenue payment: pay-per-click, pay-as-you-go, power-by-the-hour etc. are all terms used commonly torefer to advanced services. For instance, in its contract withXerox, Islington Borough Council receives a ‘click charge’each time a document goes through a machine.• Long-term contracts: Contracts of fewer than twoyears are rare. For example, The Heart of England NHSFoundation Trust has a ten year contract for its pathologylaboratory facility, while in power generation, GDF Suez willenter into contracts of 20 to 25 years.• Risk management: The provider takes on theresponsibility for ensuring asset availability, condition andperformance. An Alstom train can incur penalties of £600for every minute of delay in arriving at a station if the fault iswith the OEM.Technology innovators as services providersMany types of organisations are engaged in deliveringservices. Our focus has been on one type in particular;those organisations that have been engaged historically withoriginal equipment manufacture, and that have innovated theirbusiness models from being production-centric to services-focused. This is a process of servitization, and the languageused to describe both these organisations and the changethat they have undergone is emotive. Those ‘manufacturers’who are advanced in this transformation rarely want toassociate themselves with this label, preferring instead to beknown as ‘service partners’ or ‘providers’. Yet the phrase‘services company’ alone does not do justice to theseorganisations.These are services providers who are also technologyinnovators. These innovation capabilities manifest as research,design and production processes that result in intellectualproperty that differentiates these organisations from moreconventional services providers. These organisations exhibita capability to actually create a product (or asset), put it in thefield, manage it, maintain it, repair it, improve it, and disposeof it at end of life. Alstom Transport, for instance, sees itself asholding the ‘technical know-how and know-why’ that enablesa more exclusive service, and Xerox refers to itself as servicesdriven, technology enabled. For customers of Xerox, suchas British Airways, the value of Xerox’s technology innovationcapability is its ability to ‘understand, and redesign thetechnology and make sure it’s appropriate for the applicationand help improve the efficiency and effectiveness of processeswithin which the technology sits’.Advanced technology-enabled servicesManufacturers can deliver various forms of service. It isnot unusual for OEMs to deliver both ‘base’ services(e.g. spare parts for products) and ‘intermediate’ services(e.g. maintenance, repair and overhaul) all of which rely ontechnology to some extent. Our particular interest, however,is with advanced, technology-enabled services. Xerox’s‘Managed Print Services’ is one example; rather than simplyselling printing equipment, the company offers ‘document
  9. 9. 9Advanced services contracts also increasingly featurecommitment to on-going process improvement and costsaving. This is illustrated by BA’s tendering processes:‘We could just have employed someone to deliverletters around our business and that’s it – and thereare plenty of companies out there who can dothat – but it’s the one that has the capabilities andalso the vision to start saying well do you need tophysically deliver that letter, what about a scanningit in as soon as we receive it and pushing it througha digital workflow? What about pushing into a digitalmailroom, so that your chief executive can readhis letters whether he’s in his office in London orwhether he’s over in Spain or if he’s in Chicago?’When these four features are coupled with the principle ofdelivering a capability, contracts become sophisticated anddemanding. Many existing contracts are relatively large, whichis perhaps part of their appeal to OEMs. For instance, MANTruck and Bus UK has 10,000 vehicles under contract atpresent, and expects this to grow by 50% over the next threeto five years, to represent £200 million of business. The Heartof England NHS Foundation Trust’s five year contract in itspathology laboratory is valued at £20 million per year.Customer engagement with advanced servicesAdvanced services imply a redefinition of the boundarybetween those activities that are carried out by the customerand those performed by the manufacturer. Three forms ofcustomer engagement are identified by Finning UK;‘…customers who want to do it themselves;customers who want us to do it with them, andcustomers who want us to do it for them.’Our particular interest is in the third type (advanced services).However these call for the customer to release an elementof control, and there are only certain parts of their operationswhere customers are willing to do this.Much revolves around the criticality of the asset. As managersat GDF Suez stress, the operation and maintenance of anasset which they see as delivering a core competence is likelyto be retained, but, something simpler like an air compressorwould have a service contract with the supplier, which in turntakes on the risk associated with providing the capability.Willingness to engage in advanced services is ultimately abalance between business criticality and confidence thatthe customer has in its services partners. Historically, manyOEMs are not particularly good at support, focusing mainly onbuilding and delivering a product. In order to succeed, theirservices capabilities need to be demonstrably better thanthose of the customer.
  10. 10. 10Transformation: moving from a productto a services focusHaving established the services being offered, their features and characteristics, we sought tounderstand what had caused OEMs to develop services strategies: How had early adopters cometo servitization? What factors drove customers to adopt advanced services offered by OEMs?What factors drove OEMs to offer these advanced services? How had OEMs begun to change theirorganisations to realise these opportunities?Origins of services strategiesSome OEMs were very much encouraged to move to servicesby their customers. For MAN Truck and Bus UK the driverwas the 2006 Heavy Duty Truck Comparison in which thecompany was placed seventh out of seven for customerservice; GKN undertook an initiative to look at what its futurecustomers want; and Selex Electronic Systems also movedto services in response to customer demand. Market pull hasalso occurred through indirect routes; the UK government hasinadvertently helped to stimulate servitization through largeinfrastructure projects where it sought to encourage privatefinance. Alstom Transport illustrates how this occurred;‘Prior to privatization national operators, like BritishRail and London Underground, carried out their ownmaintenance. They bought their own rolling stock,and in some cases with British Rail they made theirown. When private finance came into it, it becamea matter of risk management, and a matter of thebanks and the finance companies saying, ‘you wantus to provide money, so we want to make surethat the asset remains in tip-top condition and thatthere isn’t any potential compromise to the life ofthe asset.’ To do that, they sought the OEM to beinvolved.’OEMs have also encouraged their customers into servitization;Rolls-Royce came up with proposals which were put to itscustomers as innovative ways of doing things, but which alsoachieve the objectives of keeping out other players whichwere emerging in the marketplace.Ultimately no one mechanism appears dominant; theorigins are summarised by British Airways as an interplay ofcustomers seeing an opportunity to manage costs, and OEMsrealising that they can’t just rely on producing hardware andthat they need to look at the soft services as well.Initial drivers of servitizationUnderstanding initial drivers of servitization is fraught withdifficulty. The benefits realised by a host can inspire a levelof ‘post-rationalisation’ of the decision, and so caution isneeded. However, we were able to identify a number ofinitial drivers, and found that they fell into two categories(See Table 1);• Defensive: Improvements in business efficiencies, costsavings and predictability• Offensive: Improvements in business competitiveness,focus and growthFor customers, defensive drivers were concerned withimproved financial, risk and asset management. Desires forcost saving were prevalent. British Airways, for example,sought cost savings and improvements in efficiency; the Heartof England NHS Foundation Trust targeted economic drivers;and typical customers of Selex Electronic Systems desired ayear-on-year improvement in cost reduction. Other customerssought to transfer capital expenditure to variable revenuepayments (carrying these on the profit and loss account ratherthan the balance sheet). Hoyer, for instance wanted a pay-as-you-go system where costs were ‘per mile’ driven, so that itsoverall contract costs were more predictable.
  11. 11. 11Table 1: Initial drivers of service strategiesWhat factors initially drove customers to adopt services offered by manufacturers?What factors initially drove manufacturers to offer these services?Customers Providers (OEMs)DefensiveImprovementsinbusinessefficiencies,costsavingsandfinancialpredictabilitySeeking to improve financial, risk andasset management, through:• Initial cost savings• On-going cost reduction• Transfer of fixed costs into predictablevariable costs• Improved asset security• Improved asset reliabilitySeeking to improve commercial viability through:• Response to customer demand• Competitor lock-out• Smooth revenue streams• Response to legislation• Product life-cycle extensionOffensiveImprovementsinbusinessompetitiveness,focusandgrowthSeeking to Improve focus andinvestment through:• Focus on core competences• Higher capital investment• Advanced technology adoption andaccess to associated skillsSeeking to improve growth through:• Greater customer intimacy (understanding customeroperations / developing relationships)• Market adoption of product innovations• Market adoption of business process innovations
  12. 12. 12Customers were also motivated to adopt manufacturers’services to drive focus and investment. For instance, BritishAirways saw these services as taking a lot of its ‘pain’ awayand enabling a focus on the core business of being an airline.Similarly Hoyer sees itself as an expert transport company,whereas the management of workshops is not a corecompetency.OEMs, by contrast, were driven towards offering advancedservices to defend their commercial viability. In particular,responding to the demands of their customers and sopreventing competitors from gaining a foothold in theirmarkets. Alstom Power illustrates this;‘…once a third party’s into one of our machineshere, they can possibly attack around the world andthat’s what we try and stop with these contracts.’OEMs were also driven towards services to assert theircapabilities in the market, helping to gain market acceptancefor new innovations that would lead to business growth.Organisational change within the OEMBoth customers and manufacturers have undergonesignificant organisational change through the adoption anddelivery of advanced services. In this study we only soughtto identify those at the forefront of executives’ minds. Mostprevalent were changes to staff and organisational culture.For instance, MAN Truck and Bus UK had to instigatea complete cultural change, coupled with changes toorganisational structure, while GKN created a dedicatedorganisation with particular service skills.
  13. 13. 13It is often necessary to engage partners to enable the deliveryof the complete set of services demanded by the customer.For example Xerox interfaces with companies like the RoyalMail and courier companies on behalf of its customers. Thereis also a need to adopt new information and communicationtechnologies to report on the location, condition, anduse of product in the field. This facilitates managementinformation (MI) that goes back to the customer, and providestransparency and a firm basis for joint conversation aroundservice enhancements.Change management is wrought with challenges, many ofwhich are not particular to servitization. Transformations arenot achieved overnight. Many of the organisations we havestudied have been on a servitization journey for at least adecade – such as GKN which started its transformation 10years ago. For others this has been shorter; MAN Truck andBus UK rose from seventh position to second place in theHeavy Duty Truck Comparison in the space of four years.
  14. 14. 14Services strategy benefitsThe initial stimulus and drivers are helpful in understanding the early adoption of advanced services.More useful still is to understand the actual benefits that both customers and manufacturers haverealised. How well did these align with their drivers? What other benefits were realised? What drawbacks have become apparent?Benefits; realisation of early driversThe companies we studied realised the benefits they sought.Table 1 expresses the ‘initial drivers’ that helped to explain theparticular motives for both customers and OEMs to servitize,and Table 2 shows what they achieved. As expected thoseTable 2: Benefits of service strategiesHow did customers actually benefit through services? How did OEMs benefit?What additional, unexpected benefits were realised?Customers Providers (OEMs)DefensiveImprovementsinbusinessefficiencies,costsavingsandpredictabilityImproved financial, risk and asset management,through:• Initial cost savings• On-going cost reduction• Transfer of fixed costs into predictable variable costs• Improved asset security• Improved asset reliabilityAlso:• Improvements in safety• Environmental improvements (e.g. energy cost/legislation)• Organisational change Improved commercial viability through:• Response to customer demand• Competitor lock-out• Smooth revenue streams• Response to legislation• Product life-cycle extensionOffensiveImprovementsinbusinesscompetitiveness,focusandgrowthImproved focus, investment and performance, through:• Focus on core competences• Higher capital investment• Advanced technology adoption and access toassociated skillsAlso:• Improved service quality to the end userImproved growth through:• Greater customer intimacy• Market adoption of product innovations• Market adoption of business processinnovationsAlso:• Growth of customers• New customers• Improved product designorganisations featured in the study recorded success(the criterion for their inclusion) nevertheless it is reassuringthat their strategies realised the specific results they sought.For example, against the customer drivers given in Table 1the following achievements were recorded;
  15. 15. 15‘We’ve handed over that activity to Xerox, and nowwe just consume on a great pricing code.’ [British Telecom]‘We put in a managed print service to take a millionpounds off the cost of printing a year, and we did it.’[University of Nottingham]‘Investment in terms of the rolling stock and theinfrastructure has been huge.’ [Alstom Transport]Benefits; beyond early driversThe benefits of these advanced services far exceed theoriginal motivations for their adoption. Table 2 shows howthis picture has developed, beyond the early drivers ofTable 1, illustrating what servitization has enabled in theseorganisations.For customers, there have been improvements in safety andenvironmental sustainability. MAN Truck and Bus UK reportedthat the services it provided improved fuel consumption byat least 10% and reduced CO2 emissions by 10-15%. TheUniversity of Nottingham sees its document managementsystems as about 70% greener. In addition, these serviceshave enabled structural change that was elusive within thecustomer.From an offensive perspective, customers have also improvedtheir own competitiveness through improved service quality totheir own customers. For instance Alstom Transport describedhow the West Coast Mainline was actually smaller than theEast Coast when Virgin (and partners) took it over. Today itis twice the size of the East Coast because of the improvedstandards of rail travel: there are now up to 32 millionpassengers a year travelling on it.For manufacturers there has been a range of significantbenefits to growth in terms of customer numbers, markets,and new market entrants. Growth with existing customershas been achieved through improved customer intimacybrought about by closer and stronger relationships. Moreover,new market opportunities have been created; for example,Rolls-Royce services such as TotalCare have supported thecreation of low-cost airline operators because the emphasison maintaining the product is with the OEMs. There have alsobeen benefits to product development, as exemplified by MANTruck and Bus UK;‘The truck is a mobile RD centre…I’ve now got aten billion kilometre database of all categories oftransport where I can show quite clearly what ourvehicles cost to operate.’Similarly, Xerox is now managing over 1 million devices, half ofwhich are those of competitors, so providing incredible insightinto the technical features and performance of products in themarket place.The manufacturers spoke of equivalentexperiences against their drivers;‘If we had not engaged as a serviceorganisation this company would be dead.’[MAN Truck and Bus UK]‘Nobody else can run this equipment moreefficiently than we can, nobody else canprovide the parts and the correct serviceprovision better than we can, so it’s a veryunique position.’ [Finning UK]‘Right now we’ve got several hundred millionpounds’ worth of contract agreements orbusiness …it is very sizeable and far beyondjust supplying a part.’ [GKN]
  16. 16. 16Table 3: Impact on business performance through service strategiesQuantified impact on customers’ performance (cost savings and growth)Quantified impact on providers’ performance (product-service mix and growth)Customers Providers (OEMs)DefensiveImprovementsinbusinessefficiencies,costsavingsandpredictabilityCost reductions that can be attributed toadvanced services.BA – 30% saving in printing and reprographiccostsIslington Borough Council 28% reduction inprinting costs over 4 yearsSandwell Borough Council 30% reduction inprinting costs over 5 years, delivered throughTransform SandwellBT 40% saving on reprographics over 4 yearsBAE Systems: “UK National Audit Officerecognised significant cost savings for MOD”Current product/ service mix.BAE Systems: 50% product 50% servicesRolls-Royce: 50% product 50% servicesXerox: 46% product 54% servicesAlstom Power: 60% product 40% servicesEvidence of range of companies aspiring to a split of50% product and 50% services; (e.g. Alstom Power –‘by 2020 it will level out at around 50/50’; MarchantCainDesign – “we are aiming for a 50/50 split in five years”; W.E.T– “I foresee the business operating at roughly an even split ofproduct versus service in the future”)OffensiveImprovementsinbusinesscompetitiveness,focusandgrowthImprovements in businesscompetitiveness, focus and growthBusiness growth attributed to adoption ofadvanced servicesAlstom Transport: increase in passengernumbers from 13 million per year to 32 millionper yearBAE Systems: “RAF Aircraft in theatre withenhanced capability”Business growth attributed to adoption ofadvanced servicesXerox: Last year 6% growth in services revenue, due toadvanced services, though total growth held back by declinein product sales revenue;MAN predicts 50% growth in services in the next 3 to 5 yearsEvidence from Alstom Energy suggests a 9% compoundgrowth in services over the foreseeable future.
  17. 17. 17Quantifying impactOur goal has been to translate these benefits into quantifiablebusiness impact. The four quadrants in Table 3 indicatehow the adoption of services had impacted businessperformance. For customers, ‘cost reductions attributed tothe adoption of services from manufacturers’ reflects theirdesired improvements in business efficiencies, while ‘growthof their own services through improved service performance’helps to indicate improvements in their own businessperformance attributable to the services of the manufacturer.For manufacturers, a move away from relying only onproduct sales, and diversification into services, was taken toindicate resilience, while growth in services revenue indicatedimprovements in business competitiveness.Quantifiable performance data is elusive and too commerciallysensitive for many organisations to divulge. Typically we weretold ‘we don’t feel comfortable sharing details about this butwe have seen a very significant increase in revenue as a resultof us having embraced advanced services. This is a trend weare seeking to harness and continue into the future’. Wherewe were given evidence, we were often not permitted topublish it.Table 3 captures the limited data that organisations werewilling to share. For customers, leading adopters haveexperienced significant cost reductions through the adoptionof advanced services. These range from 25-30%. Althoughthe data points are few, there is clear indication that significantsavings are possible. Likewise, while we were told of manyimprovements to services of customers, only Alstom Transportwas able to indicate this impact by describing the change inpassenger numbers on the West Coast Mainline.Evidence is stronger for OEMs themselves. A range ofcompanies indicated that they had either achieved, or arestriving to achieve a 50/50 split in product/ service revenues.Although it is difficult to establish the precise make-up ofthese service revenues, there is clear indication of a ‘balancedeconomy’ within manufacturers themselves, improving theirresilience to economic downturn. As for growth, the evidencewe have suggests that OEMs themselves believe they canachieve a growth in services revenue in the region of 5-10%per year. Again, there are many caveats to this figure; the maintake-away point is that growth is seen as achievable in anotherwise stagnant economic context.Business trade-offsThe counterbalance to the benefits of offering advancedservices is complex. It is all too easy to become distracted intoa debate around the challenges of transforming and adoptingservitization. Our focus is not this change managementprocess. Instead, our interest is in understanding thedrawbacks of being successful in adopting and deliveringadvanced services.For the customer, one danger is that the long term contractsassociated with advanced services have the potential todisrupt innovation and technology adoption. Moreover thenumber of people employed in the delivery of services canreduce, especially within customer operations. This may be adesired change, but may, in some cases, inhibit adoption. Forexample, Alstom Transport cites Bucharest Metro, where theworkforce has gone down from 1,700 to circa 850, by movingit from public to private operation.For manufacturers themselves, conventional revenue streamsare likely to reduce. Sales of spare parts will decline, and theinternal consumption of spare parts (for repair and overhaul)reduces as these become a burden on the host; AlstomPower has seen its concentrated product development andsupport organisation shrink significantly.
  18. 18. 18Enablers and inhibitors ofservice adoptionOur study also explored the process of advanced services adoption. In particular: What factorsare inhibiting and enabling the adoption of these services within both customers and OEMs?Table 4 summarises our findings.Inhibitors within customersCustomers resist engaging in advanced services wherethey are unconvinced, uncomfortable, or unable. There arepractical factors around: ease of product substitution (e.g. ifit fails it can be replaced easily); availability of suppliers thatcan offer a sufficient range of technologies; and institutionalunwillingness to engage in outsourcing style contracts.Adoption will also be hindered where there is fear thatbeing overly dependent on a single supplier may restrict thecustomer’s ability to obtain value for money (both now andin the future). For example, Finning UK described how someof its customers fear that putting ‘all their eggs into onebasket’ may restrict their ability to get best value for money,and Islington Borough Council stressed the importance ofknowledge retention to enable market re-entry, should thisbe desirable.Even when the prospect is appealing, the customer maynot be able to adopt advanced services. Limiting factorsexist around process compliance, budgeting systems, datasystems, legislation and contracts. For instance, Heart ofEngland NHS Foundation Trust stressed the importanceof process compliance before services can be consideredfor outsourcing. Contract complexity can inhibit both thecustomer and manufacturer. Another factor is a lack ofpeople with the appropriate contracting skillsets. Moreover,even when a contract is in place, there may be a reluctanceto continue engagement if the customer feels service levelsare not being met or more generally that value is not beingdemonstrated.Enablers within customersCustomers are enabled to adopt advanced services whenthey are confident of clear organisational fit, and haveprocesses in place that reassure them of value for money,by either benchmarking or reliably knowing their own costs.In the case of Eon UK;‘You’re okay actually letting the manufacturer do theservices for you but you want to feel confident thatyou’re getting value for money.’Trust in the services supplier has a direct impact.‘We have to trust them that they’re not just going towalk away and leave us with very little support.’[Heart of England NHS Foundation Trust]‘For our customer putting more trust in their clientwas quite a major change of culture for them whichthey struggled with for quite a few years beforecertain people recognised the benefits.’ [Rolls-Royce]Inhibitors within manufacturersManufacturers share inhibitors around contracting, finance,and data systems. The skills to construct usable and reliablecontracts are a major inhibitor for smaller organisations, as isthe availability of finance from third parties to ‘unlock’ servicescontracts.Assuming that the manufacturer is committed to pursuingservitization and delivering advanced services, there are alsoparticular inhibitors that impact their ability to follow andsustain such a strategy. Linked to contracting is the lack ofintellectual property within the manufacturer to innovate andmodify its technologies to give the cost and efficiency savings.‘Sometimes our ministry tries to buy rights to IP….you’d have thought we were in a strong position.The Australian Air Force came along a bit later andactually got rights to the IP. So somehow or anotherour Ministry of Defence didn’t do ... didn’t match upto the negotiations that the Australians got.’[Marshall Aerospace]
  19. 19. 19Table 4: Enablers and Inhibitors of service strategiesCustomers Providers (OEMs)InhibitorsCustomers are unconvinced, uncomfortable,or unable when:• Products are easily substituted• Providers don’t hold sufficient range of technologies• There is an intuitional unwillingness to outsource• Value for money is not demonstrated• Technology innovations lack visibility• Control is lost / being dependent is a drawback• Process compliance is weak• Budgeting systems lack flexibility• Management information is lacking• Useful and usable contracts are not availableOEMs are unable to support services when:• Useable and useful contracts are not available• Financial resources for business transformation areinsufficient.• Management information is unavailable• Contract length is insufficient to recoup investment• Intellectual property to support innovation is insufficientEnablersCustomers are confident of clearorganisational fit when:• A trusting relationship is in place• They are reassured of value for money by processesand competition• Applications are repeatable and predictable• Processes can be re-engineered• An evidence-based business case exists• A financially stable service provider is involvedOEMs are confident and capable when:• A strong relationship with the customer exists• They have strong relationships with their own suppliers• Their equipment is reliable• The customer is an organisation with credibility• They have the ability to respond to customer need• They have the ability to innovate processes andequipment• They have access to required skill sets, including thecapability to setup and manage projects• They have the ability to identify and manage risks(to transformation/operation/reputation)
  20. 20. 20Skillsets in general are a major concern for OEMs.‘…if you look at where technical skill setsare developed, it’s generally within a newbuild environment. And my concern is withmanufacturing- certainly within the heavy industries-actually being minimised, then…will that know-howand know-why and capability be there to sustainservice business in the longer term? Now I think ifyou look at the service businesses in the UK thenthere’s still very heavy skill sets that are there frommanufacturing … My concern is, in 20 years will westill have that same capability?’ [Alstom Transport]Enablers within manufacturersFor manufacturers, a principal enabler is having strongrelationships with the customer. As Finning UK argued, ‘havingthe relationship is pretty much key to our success, if not thewhole of it’. Underpinning this relationship is the reputationof the equipment and organisation itself. Again, Finning UKexplained that‘Customers that want to deal with us knowthat we are backed by Caterpillar – it’s a verypowerful brand.’Relationships between the supplier and its supply chain areequally important. As Finning UK put this;‘We leverage our relationship with Caterpillar, theyunderstand that the customer is our customer,that buys through us to buy and get the Caterpillarproduct. So one doesn’t jump in front of the other,we are very joined up with this.’The manufacturer is also enabled by its capability to innovate.This is not simply a case of having a services function anda production function as part of the same organisation;internal systems have to be in place to link these capabilities.Moreover, a capability to set up and project manage atransition to advanced services is essential.
  21. 21. 21Potential for UK business and economyThe growth of the UK economy is stifled. The index of manufacturing fell by 1.4% in February 2013when compared with February 2012. The largest downward contributions in manufacturing outputwere: the manufacture of coke and refined petroleum products, which fell by 16.0%; followedby the manufacture of basic pharmaceutical products and pharmaceutical preparations, whichfell by 13.6%; and the manufacture of rubber plastic products and other non-metallic mineralproducts, which fell by 6.9%. The only significant increases came from the manufacture of transportequipment, which rose by 8.4%; and other manufacturing and repair, which rose by 1.4%. Analysis isunfortunately complicated by the recession. However, even this indicates a generally declining trend inmanufacturing employment and percent of GDP, balanced by a growth in services.The key question for businesses and the economy on theimpact of servitization is around net benefit: is it going topromote growth through enhanced competitiveness and soreverse this trend? This is easier to answer at a business levelthan on an economy-wide level. The companies we havestudied certainly indicate potential, with examples of growthranging from 5-10% year. This confirms previous studies(e.g. Barclays Bank report, 2011) which indicate a positivecorrelation between the adoption of servitization and growth inrevenue, profits, and employment.At the economic level, however, we must also take accountof displacement and ripple effects. To what extent doesthe success of a servitized company achieve efficienciesat the cost of other (albeit less productive) businesses andemployment? To what extent does the improved ability tocompete globally with this business model serve to enhancewealth-creation in the UK? There is clear evidence thatservitization is a response of manufacturers in advancedeconomies to external pressures, a chance to differentiatetheir offering, and a way to support economic restructuringand growth. Conceptually, servitization offers an opportunitythat can impact both national and regional growth. It movesaway from reliance on simply ’selling a product’ and builds ontechnological capabilities.The senior executives that have participated in this studycomprehensively reinforce the message:‘Britain went too far towards services, and has gotto get back to manufacturing … but the two arecompletely complementary in these terms.’ [GKN]‘You’ve got a safer, more reliable, more economicaland more environmental installed based, numberone.’ [MAN]‘It presents an opportunity for companies whichare basically listed on the UK Stock Market to get afoothold in other markets in the world.’ [BAE]Exploitation of servitization can be enhanced by industrialpolicy. Adoption is inhibited by a lack of awareness in OEMsand their customers. This innovation is fragile, and OEMsneed help with the associated changes to organisationalculture, skills, contracts and financing (Table 4) that areparticular to servitization, so that they can deliver serviceswhilst building their technology innovation capabilities alongthe way. The government did much to stimulate the inceptionof servitization in the UK with large OEMs in the 1980s; thereis now opportunity for a second phase of initiatives. Actionsshould include:• Improve the measurement mechanism at a micro andmacro-level so that progress in the adoption of servitizationcan be better monitored within organisations and in theeconomy as a whole.• Improve awareness of and incentives for the adoptionof services from OEMs (big and small) amongst publicservants responsible for both national and regionalprocurement of goods and services.• Encourage financial and accounting institutions toappreciate the value of services from OEMs, and aid themin finance and contracting.• Continue to develop an engineering and technology skillsbase in the UK, and educate students that these skills canbe exploited in the delivery of services rather than simply inproducts alone.
  22. 22. 22Concluding remarksIn this study we have engaged executives from organisations that are significantly important to theUK economy. There is little doubt that competing through services is a vitally important concept forthe future. It is not a panacea, it is not for all organisations at all times, but it is an aid to improving thecommercial and environmental sustainability of the national economy. To summarise:1. OEMs that have been early adopters of services strategieshave largely done so to protect their commercial viability(Table 1). They have also found that services enableinnovations to both products and business processes thatresult in growth in business with both new and existingcustomers (Table 2). This diversification impacts theirresilience (revenues from products/services are typicallysplit 50/50) and enables overall business growth (typically5-10%, Table 3).2. Customers use these services to improve their financialstructure, risk profile and efficiencies around assetmanagement (Table 1). They have also found benefits totheir own growth as a consequence of improved serviceperformance (Table 2). Leading adopters have experiencedsignificant cost reductions (Table 3) and experiencedbusiness growth in their own services to their customers.3. Resilience and growth in the UK economy can bepositively impacted by servitization. While the UK economyis complex, multi-faceted and un-predicable, there isreal revenue growth amongst OEMs that successfullydeliver services. Consequentially the executives in ourstudy see significant potential for both the regional andmacro-economy if the opportunity presented by theseservices-focused business models can be harnessed moreeffectively.4. Exploitation is inhibited by a lack of awareness in OEMsand their customers. This innovation is fragile, languageneeds to coalesce, and nurturing is needed while ourunderstanding develops. OEMs in particular need help withthe culture change, skills, contracts and financing that areparticular to servitization. (Table 4).This is a report on industrial practice. It has set out to illustratehow OEMs are competing through a services-focusedbusiness model, the impact this has made, and the enablersand inhibitors they have encountered along the way. Itprogresses our understanding of this phenomenon, but thereare three areas where further work is needed in the immediatefuture:• Understanding what fails: Our study has exclusivelytargeted organisations that have succeeded with theadoption of servitization either as providers or consumers.It would be helpful to gain insights into organisations thathave chosen not to take this route, and it would be valuableto know more about OEMs who have in some way failed toachieve the desired outcomes.• Understanding the relative significance of enablersand inhibitors. Our study has reported on a raft ofenablers and inhibitors, but with limited indication on therelative importance of these. Improving our insight in theseareas will help shape the strategies of organisations andindustrial policy. Knowing what works, and what stopsit from working, is critically important to widespreadadoption of servitization,especially in the light of cloud-based technologies that offer customers new tools andmanufacturers new servitization opportunities.• Strengthening evidence of economic impact. Reliableindicators of the economic impact are elusive. The trueimpact of industrial innovations is difficult to determinereliably – try assessing the true value of Lean techniques!Nevertheless, we need to continue to strengthen theevidence base to heighten the debate and indicate theopportunity for the national economy.
  23. 23. 23Appendix:The expert panelCompany Name Job TitleInterviewedasacustomerBoughey Distribution Services Paul Brimelow Group Fleet EngineerBritish Airways Mark McCarthy Procurement Executive, Corporate Services,British Airways PLCBritish Telecom Michael Davidson Desktop Service Delivery Manager,End User Technology and SecurityBritish Telecom Cate Warman-Powell Procurement Manager, BT Group ProcurementEon UK Paul Morton Plant Manager, Grain Power StationGDF Suez Michael Maudsley Manager, Deeside and Shotton Power StationsHeart of EnglandNHS Foundation TrustSimon Hackwell Commercial Strategy DirectorHoyer Mark Binns Group Board DirectorIslington Borough Council John Roberts Head of Accommodation, Facilities and Corporate LandlordTransform Sandwell Mark Mayer Chief Operating OfficerUniversity of Nottingham Jim Reed Director of ProcurementInterviewedasaproviderAlstom Power Alexander Bill Service ManagerAlstom Power Richard Kelly Operations DirectorAlstom Transport Martin Higson Tram Operations Director – Train Life Services, UK IrelandAlstom Transport Michael Hulme Vice President – Train Life Services, UK IrelandBabcock International Andrew Chappell Head of Supply Chain CapabilityBAE Systems Terry Warren UK Defence Collaboration ConsultantFinning UK Jason Howlett Director of Equipment Solutions DivisionFinning UK Paul Ryder General Manager Product Support OperationsGKN Andrew Reynolds-Smith Chief Executive, Automotive and Powder MetallurgyHaigh Engineering Mark Brian Managing DirectorHCL Technologies PadmakumarEaswarapillaiDirector of Manufacturing SolutionsIBM Global Business Services Elliot Hirst Senior Managing Consultant, Product Lifecycle ManagementMalvern Scientific Kate Browne DirectorMAN Truck and Bus UK Des Evans Chief Executive OfficerMarchantCain Design Pamela Cain DirectorMarshall Aerospace Neil Goulding Head of Commercial, Support SolutionsMarshall Aerospace Nick Whitney Managing Director, Support SolutionsRolls-Royce Stephen Marlowe Head of Services Research and DevelopmentSelex Electronic Systems Doug Whittaker Head of Platform Solutions (UK)UK Council for ElectronicBusiness (UKCeB) / Rolls-RoyceSteve Shepherd Executive Director, UKCeBWater Environmental Treatment Gary Parkinson Managing DirectorXerox Tim Pearce Head of UK Marketing, Global Document Outsourcing
  24. 24. Aston UniversityAston TriangleBirminghamB4 impact study: How UK based manufacturingorganisations are transforming themselves to compete throughadvanced services, Aston Centre for Servitization Research andPractice, Aston Business School, Birmingham, UK.For further information andcopies please contact:Professor Tim BainesAston Business School©2013 Aston University. All rights reserved