Servitization: from product to service business models

FLIGHTMAP dashboardMy definition of service innovation is simple, it is the successful creation and adoption of new services. This definition includes the special case of servitization, where a company adds service propositions to its historical products portfolio. During the 1990’s, I worked in IBM, where the main innovation thrust was to move towards more and new services, such as consulting and outsourcing, on top of the hardware and software product sales, and the more traditional product-related services such as training and maintenance.

Over the past years, I worked with multinationals such as Philips, Océ, TomTom and others on this challenging topic. In spite of its simple definition, service innovation turns out to be not so simple. Maybe even more than in product-centric innovation, all aspects of the service business model require attention during the innovation process. This ranges from the service value proposition to channels and partners, the key assets and control points, and the cost and revenue structures. You could say that business embedding is essential for successful service innovation.

The intangible nature of services means they can only be observed and evaluated in real customer interactions. This requires not just customer insights but also customer involvement in the service creation process, and should shift research focus from desk research to field research.

Service innovation in the portfolio

Last year, at Bicore we also conducted a study on the Servitization trend in the dutch manufacturing industry: this study confirms the need for a more iterative innovation process. It is exactly this “searching” process that also drives the need for more frequent portfolio revisions. It requires careful management of the balance between customization (to learn most) and standard service development (to scale best). After the initial development, services have to be rolled-out for more gradual adoption by service delivery units. Also in this sense, service innovation is more embedded in the operational business.

As research by Andrew Davies shows (e.g. in his MIT Sloan 2006 article), service businesses require a different split in organization structure. More work in the front-office, not just sales and marketing but also service delivery and even service innovation, and a different role for the back-office: ensuring scalability of the service delivery through common components, automation, and efficient scheduling of resources (across front office assignments).

Where it may be easy to start a service business by “just” servicing an initial small customer set well, the major challenge for successful growth is finding scalability (in face of differentiation). This requires a portfolio approach over fixed service assets (service IT infrastructure, service brand, service delivery staffing, ecosystem of partners). This scalability requires a careful separation between unique services (we call them OOAK – One of a Kind) and the services that need to scale after the first few clients: FOAK (First of a Kind). Pitfall number one seems to be building a portfolio of OOAKs while trying to build FOAKs that can scale…

Implementing this scalability is very different across the service business spectrum: service business models range from mass consumer services (millions of small transactions, such as app downloads for $0.99) all the way up to bespoke, long-term Public-Private Partnerships (a handful of major long-term contracts, such as 30-year billion $ public transport concessions or outsourcing agreements).

It is a strategic transformation

We have seen the strategic importance of this transformation at Bicore, where we made the transition from one-time innovation strategy consulting assignments to recurring subscription service for the FLIGHTMAP software platform. It is in this platform that we have included both product and service business models for a mixed portfolio. However, maintaining the mix may be the most difficult strategy of all; making sure that the transformation is completed requires careful portfolio management.