Servitization as a product strategy

The way we interact with customers is changing. Traditional episodic encounters are being replaced by continuous personalized interactions. At the heart of this is servitization: the shift from traditional business models to an outcome-based, product as a service (PaaS) model. And companies are now being forced to rethink and reinvent their service models to stay relevant. But how is servitization impacting the business world and what must be done to make it work for you?

By Maxence Tilliette, Brett Humphrey, Arnendu Bose and Shalini Gopikumar

By 2025, 79.4 zettabytes of data are expected to be generated from approx. 41.6B Internet of Things (IoT) devices, says the IDC Forecast. A large portion of this data will come from non-personal business-to-business (B2B) and business-to-customer (B2C) interactions. Specifically, it will be generated through increased connectedness with customers, services providers and/or manufacturers and other ecosystem partners.

This data is fueling the shift to servitization. Entire industries are moving from traditional customer interactions to connected, long-term customer relationships. They’re offering continuous, low-friction and personalized interactions that drive new levels of convenience for customers. But the changing of the status quo has also led to changing expectations. Customers want services and products that are reliable and always on, tailored to their needs, and developed and delivered in a socially responsible manner.

Servitization is changing the very basics of our life. Companies like Amazon, Facebook, Google, Uber and Netflix have become a part of everyday life for many of us due to the convenience and personalization of their services and products. Another example of servitization and PaaS in action can be found in the theme parks of Disney Magic: real-time updates on ride availability and restaurant vacancies are provided to customers based on customer preference.

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What this means is we’re seeing a significant change in consumer behavior and companies must rethink service models to stay ahead of the competition.

Back to basics

The shift to servitization is highly evident in the B2B industrial space. Most companies in this market sector are quickly moving towards connected products and services. They’re employing a wise pivot from a product economy to a service economy and enabling a new level of efficiency in the customer—manufacturer—raw material supplier value chain:

All of this is leading to a more transparent and resilient sector where the highest levels of efficiency and profitability can be achieved with optimum cost outlay. Interestingly, this equation was considered to be inversely proportional until a few years ago. The secret sauce helping B2B industrial companies and original equipment manufacturers (OEMs) succeed is their ability to leverage real-time data, generated within their ecosystem, to analyze and increase asset utilization and optimum availability. But this means such organizations must ensure their products and integrated services are designed to be smarter. It helps to generate data, identify trends and enable predictive actions in an almost touchless manner.

The arrival of new digital technologies like low-cost sensors, embedded controllers, cloud, IoT, artificial intelligence (AI) and machine learning (ML), and 5G-enabled wireless communications are powering B2B players to realize their aspirations. In fact, 5G alone is regarded by the sector as the single biggest propellent of industrial connectedness.

The shift towards servitization and greater consumer power is also driving a new trend among OEMs: they’re pivoting from the traditional model of manufacturing and selling superior hardware products to an outcome-based, PaaS model that enables customers to purchase and consume an outcome instead of purchasing equipment that delivers “said“ outcome.

During the last three years, many organizations have taken the leap from conceptualizing a strategy to piloting it in a scaled manner across several product and service lines. Doing this has helped them create a vast digital divide between them and the competition. A classic example is that of Komatsu Mining, a leader in the mining industry.

Komatsu has heavily invested in digital technologies—the company’s mining products are estimated to stream approx. 60000+ data points per second. To leverage this data source and pivot to an outcome-based product portfolio, Komatsu launched Smart Solutions. It’s a comprehensive package that integrates smart, connected products and systems, advanced analytics, and direct services that are customized to solve customers’ biggest challenges in operations and equipment performance.

A similar product revolution is happening in the Medtech industry. Leading organizations such as GE Healthcare, Siemens and Fresenius are starting to offer equipment via a pay-per-use/pay-per-outcome model. And they’re joining hospitals and other healthcare providers in offering Value-Based Care (VBC). For example, GE’s TruPay offering provides the complete care of certain medical equipment, such as REVACT equipment, through a pay-per-use model. It comes with built-in performance commitments including 95 percent equipment uptime, complete care for three years, and 24/7 online remote services. In return, GE determines prices based on outcomes delivered.

Industry experts know OEMs must adopt PaaS as a business mandate and reposition themselves as service companies. They need to rethink their business and service models, realign the talent strategy, revamp the operating model and completely reconfigure business architecture to embed PaaS across the organization. Those that do stand to thrive rather than survive. In fact, we believe that adopting PaaS can drive 15-20 percent annual growth in services income. Accenture’s PaaS Business Architecture framework was developed to help companies make this growth a reality.

Designed for success

Most companies understand the benefits of servitization. But they struggle with the large-scale integration of this business model into the product and service portfolio. To succeed, they must embed a robust business architecture to help with the pivot from a product economy to a service economy. Our team of Industry X advisors developed the below framework to guide organizations as they accelerate their journey to servitization.

By methodically embedding each of the six business architectural blocks into the business and operating model, organizations can safely pivot to a sustainable servitization model. They can deliver outcomes to customers rather than products. And they can drive superior customer satisfaction to maximize their margins. In subsequent blogs, we will explain this PaaS business architecture and how it can be adopted within organizations enabling a transition from a product-based to a Service led outcome-based configuration.