Servitization Challenges Professor Rogelio Oliva VM Hello, my name is Veronica Martinez. Today I am interviewing Professor Rogelio Oliva from Mays Business School at Texas A & M University. Rogelio, thank you for coming and being with us. I have a question for you. How did you get interested in servitization? RO Well first I think that term, servitization – if I got it right – in this trip it’s the first time that I have ever heard it. I don’t think it’s a term that is commonly used in the United States. I think most of the literature and most managers are talking about bundling services with products or making the transition to providing more services. The servitization term, I am not sure whether it is a European or a UK invention, but nevertheless the interest to explore what are the issues of product manufacturers bundling more services with their products is definitely one of the hot topics. My entry into the whole field was slightly unorthodox I would say. I would consider myself a student of service, service operations. I spent most of the nineties looking at how is it that service organisations deliver value, create value, how do they maintain service quality, and so on. And out of a series of studies, this is a caricature, but perhaps a way to summarise the findings would be something to the extent that if you manage a service operation as if it were a manufacturing operation you will kill it. If you use the metrics that we normally use to assess productivity, throughput, cost containment in a manufacturing setting and you bring all those metrics into a service setting, then quality will begin to erode, you are going to lose customers. All things that go wrong will go wrong. So this is where I stood basically at the end of the nineties, beginning of 2000 and then you begin to read about all these initiatives that are saying try to bundle more services with your products. And it makes perfect sense. Services are more profitable, the source of revenue is more stable, they provide a sustainable competitive advantage. There are a lot of things that suggest that if you were a good product manufacturer it is a good idea to bundle services with your product. But if you believe what my research was saying during the nineties, my prediction was this is going to be very, very tough; this is going to be very difficult. So basically I got into the whole field and started exploring the notion of how to make this transition based on my initial prediction that this was Professor Rogelio Oliva
going to be difficult and I wanted to figure out whether indeed it was proving to be difficult, and what were the barriers in the process. So that is how I got started probably early 2000. VM Very interesting. Rogelio can you talk about how organisations can make the transition from the traditional kind of view of manufacturing, to offer more of a product service bundling and if there are any generic steps that you could enlighten us with? RO Well you have to be very cautious when you try to generalise into here are the three steps and things like that, but what I can do is report on some findings for some small sample studies that we did. One of the things we did in late 2000 is we went out and we talked to capital equipment manufacturers – German all of them – and just addressed the question how much services are you bundling with your products? How easy has it been to do this? How much do you want to end up doing at the end of this transition? And get a sense of what was the process for them like. And out of that review process we did, or a series of case studies, I think there is a couple of lessons that I would argue or findings that I think if not, if I would be cautious to make a general recommendation for managers, I would say at least to other researchers we need to take a closer look into this set of issues. The first one – and this one, I am comfortable giving this recommendation to managers, it sort of makes sense – the transition, the trip into services, it’s not something that happens spontaneously or organically. I think it is something that has to be deliberate, very well planned, systematic; it is a huge stress for the organisation. You are suddenly asking a manufacturing organisation to grow a set of capabilities that are not necessarily embedded in them. And this is a traumatic experience, not only from the new capabilities, new process, new resources, but also from a new culture. Now your employees have to relate to the customer in a completely different way. You used to sell a printer, the customer walks away, you don’t see them again until five years when they decide they will get a new printer and now you want to service that printer. So you want to know what kind of ink they have been using, how frequently did they use it, when is their scheduled maintenance and now you have to develop a whole new set of relationships with the customers – you have to start thinking about your customer differently and that is difficult, that is traumatic and it takes time, effort and a lot of management time. This is something that has to be planned. So that would be lesson number one. Now in that journey, the transition – the elements of the transition – I would argue what we found is that it is based on capabilities. Most of the companies that manage to do this successfully focus on a smaller subset of capabilities and say ok, I am going to provide spare parts Page 2
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support. And you build the capabilities to provide spare parts support and then you offer that to the market and so on. One of the issues that has come along and has dominated a lot of the discourse is we have to become solution providers. And to me a solution provider is at the end of the spectrum – you are a total service provider now, your product is only a small component of your whole offering. And when manufacturers face that challenge, it’s a daunting challenge. I believe that there are stepping stones. There are small things that you could start offering; smaller services, incremental services and by the way, you are going to be much better at doing all those incremental services because they are closely related to your product. And then if you mature and develop those capabilities you can start moving into the next stage. The second big lesson that we got out of this effort is the notion that successful firms, firms that manage to successfully deploy services, did this by basically creating a different organisation. They isolated the service operation, protected it from the manufacturing metrics – and again, if you believe my research from the nineties, this sort of makes sense. Isolate or protect your service organisation, let it flourish, let it develop its own culture and then think about ways that you can integrate to have a better offer. So I think that one of the things that we find is this notion that realise that you are growing something that is different from the organisation and it’s going to be very different to nourish it if it is still embedded or surrounded by the manufacturing organisation. So I think those are the two biggest lessons if you will of what we find. I think that should give managers enough guidelines to start thinking how far do I want to go? What are the issues that I need to consider? But basically it’s the realisation that it is not going to be easy. Services and products together make sense out there in the market. They belong together, that is how we consume products. We want the product and the service that make that product viable and it is a good market bundle; it is not something that they can co‐exist very well within the organisation. Creating products and services with the same organisation is going to be difficult, so this notion of distinctiveness between the two organisations is something that is going to have to be addressed explicitly. VM Excellent. Do you have any examples or a couple of examples of organisations who are doing well in this bundling of products and services? RO I think there are a couple of companies that are archetypical in this transition. You have IBM, for instance, it’s an example currently 50 odd percent of their revenue is coming from the service space, from the consulting and they are in a position when they are hired to design a Page 3
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solution for a client the consulting team comes in, designs and specifies the products and the processes that will be required and if an IBM product is not the best product to do that service, they will not recommend an IBM product. So they are completely separated from the product division in the sense that they are more interested in providing a good service and if that good service requires recommending the client a different kind of hardware, they are happy doing so. I think that is an archetypical example. There are strong organisations – General Electric, Otis – that have very strong components on service and clearly services that are more related to the products; either financing, maintenance, remote monitoring and things like that. There are some conditions or some of those industries have had a unique advantage in the sense that there might be legislation supporting the introduction. For instance, if you build jet engines, in the States the FAA (the Federal Aviation Administration) will have very strict requirements on how that engine needs to be maintained and so on and all the spare parts that go into the engine have to be original. So if you are selling services as GE, I am going to service my own engines, then you had a distinct advantage in capturing that business. So it’s not surprising that companies that have that support from legislation – Otis Elevators, lifts; GE, medical equipment; Rolls Royce, turbines and things like that – those are companies who have taken advantage of the fact that there are legislations supporting the maintenance of their products. But they are clearly doing it very well. I would say they have been successful in creating the existing culture that we can extract revenue now from the services. VM Excellent – thank you Rogelio. RO My pleasure. Page 4