In a new series of extracts from an excellent white paper published by IDC and sponsored by IFS, we will explore the IDC Servitization Barometer which is designed to allow field service organisations to chart their path to new revenue streams. In part one we look at the rapid and wide reaching change that is being faced by manufacturers in all sectors, in all regions...
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Production-oriented industries anchored in physical value chains are undergoing a process of deep transformation. Business leaders must find new ways to adapt to rapidly changing customer expectations and volatile market conditions. Rethinking the approach to ideation, innovation, and new product and service development is critical to maintaining top- and bottom-line growth.
Digital transformation initiatives are being rolled out with the end goal of making enterprises “Borderless.” This means the powering of a digital network that integrates internal and external silos to deliver more value to the ecosystem, including employees, customers, suppliers, and partners.
IDC research (see figure 1 below) indicates that digital organizations in production-oriented industries are benefitting from strong growth in terms of revenue and profit. Non-digital organizations struggle.
As digital transformation evolves from a cluster of one-off projects to the generation of new business models, business leaders are required to deliver the associated business outcomes from digital investments. In fact, in a recent IDC survey 65% of CEOs stated that they were under considerable pressure to craft and execute a successful digital transformation strategy that enables financial growth in their organizations.
In production-oriented industries, success is dependent on the ability to bring a much stronger service value proposition to play. Servitization is therefore turning into a top agenda item in this sector, with 82% of firms actively exploring or moving to servitize their businesses. The transition towards servitization in these industries is potentially motivated by the fact that the respondents expect the average proportion of annual revenue generated from services versus products to double from 8% in 2019 to 16% in 2022.
IDC describes servitization as the process whereby organizations with physical value chains enhance their products with — and ultimately package them within — advanced services such as digital applications and payment models based on consumption or outcome. According to IDC’s research, there is a strong correlation between servitization maturity and revenue growth. All organizations in the most advanced stage of servitization have reported growth in the top line in the past year, often over 5%. On the other hand, the revenues from 88% of organizations in the earliest stage of servitization maturity have either decreased or stayed the same in the past 12 months.
"Servitization is a journey and its end stage is the creation of an end-to-end value chain..."
In most organizations, servitization is a critical element of the overall digital transformation. It involves a transformation of the core systems, leveraging emerging technologies such as IoT and machine learning, which in turn enable organizations to access real-time data from the ecosystem and transform it into actionable insights.
Servitization is a journey and its end stage is the creation of an end-to-end value chain. This can only be enabled by driving interoperability at the application level, where the ERP systems underpinning the supply chain are seamlessly connected to the applications enabling field service and contact center agents, as well as the sensors collecting data from deployed products. The outcome is a continuous flow of relevant information across front-office and back-office to increase operational performance and new revenue streams based on data-driven services. Figure 2 (below) illustrates some of the benefits that servitization could deliver to production-oriented organizations and their end customers.
Examples of companies heading towards servitization include:
- An Israeli-based industrial valves manufacturer embedded IoT modules in its products, allowing it to charge customers based on volumes of liquid processed. The customer can program the valves for remote manual operation or set a machine-learning algorithm to do that. This increases efficiency in the industrial operations.
- A forklift maker connected one of its products to a cloud backend with GPS tracking, offering its logistic customers remote maintenance services and a fleet management service to locate its forklifts.
- A global defense and security provider offered aircraft fleet maintenance and repair services. In order to ensure high availability of the equipment for its customers, this organization has linked the systems that underpin the maintenance and repair cycle to its enterprise resource planning (ERP) applications. The outcome is the delivery of an effective fleet readiness management to customers and the generation of new revenue streams coming from more after-sales services and improved customer satisfaction.
Based on discussions with companies in the sectors impacted, IDC believes changes in business models are part and parcel of servitization. These can be played out in three ways:
- Augmentation of product-based revenue with additional service revenue going beyond traditional services (maintenance, break-fix etc.) to include data-driven digital services (e.g., Fleet management service above)
- Partial or complete switch from upfront sales towards consumption or outcome-based models (e.g., “pay-per-liquid volume processed”)
- Monetization of proprietary data through licensing to third party (e.g., a car manufacturer selling access to driving behavior data to an insurer)
While complexity and impact on overall organization changes between the three approaches, IDC believes that all these new approaches to business models signal that a servitization journey is on the way and positive effects for the top and bottom line are a consequence of those.
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