Transitioning from products to services to fuel growth

Consumer and industrial products companies are facing greater competition and products are increasingly being commoditised leading to price erosion and margin pressure. As a result, they are struggling to maintain growth and operating profit expectations through traditional product revenues alone. Companies that expand their offering to include value-added services are able to achieve higher operating profits, competitive differentiation and greater customer centricity.

Customers don’t simply buy products anymore and are increasingly looking to pay for the services they provide. They don’t want to own their devices or use their own resources to manage and maintain them, and prefer to outsource the management of their assets to the original equipment provider or third party service providers. Digital and Industry 4.0 are creating new opportunities to offer more services and establish outcome-based business models (e.g. pay for performance, availability). Such value-added services can be very lucrative and generate high gross margins. In addition, implementing successful service strategies allow companies to become much more entwined in the customers’ process and generate more value which in turn creates greater customer loyalty.

Growing the service portfolio

Shifting from products to services and expanding the service portfolio to include outcome-based solutions is not easy and not without risk. Product lifecycle services, for example repair and maintenance of products supplied, are traditional services that are already offered by many companies. More difficult is the expansion into asset efficiency services, customer process support or outcome-based solutions such as availability and pay-as-you-go services (see Chart).

Industrial products company Atlas Copco’s FleetLink management system allows remote monitoring of construction equipment by sending servicing notifications to its asset owners. Such data can be used to develop pricing models based on outcome, which opens up opportunities to sell in different ways. Philips smart lighting solutions provides an efficient energy monitoring system that allows greater customisation and reduces energy consumption. Wind turbine manufacturer Vestas offers active output management (AOM) solutions, with flexible service contracts tailored to customer needs and their return on investment expectations.

The success of the transition will depend on a company’s ability to anticipate long-term contract risks, scale service capabilities and overcome a traditional OEM mind-set. Companies that move into higher value proposition services too quickly – for example transitioning from parts/repairs and technical and logistics services to financing, long-term service contracts and outcome-based solutions – risk impacting their brand, reputation and financial position if they fail to deliver. Successful companies are developing these new services together with the customers they know best – they start small to demonstrate results and then scale quickly.

Making a successful transition from products to services

Many consumer and industrial products companies start the transition by offering limited services, typically based on customer demand and focused on extending the product life-cycle. These services are viewed as an extension to the product they offer while the company’s major focus is on designing, manufacturing and selling hardware. ’Service leaders’ typically recognise the need to develop their services as a separate business line. They establish distinct P&L accountability, develop differentiated processes and capabilities for services, and dedicate resources in marketing, sales, operations and R&D to follow a distinct service strategy. Growing services as a business requires a certain degree of ring-fencing initially with a separate team and distinct capabilities dedicated to growing the service portfolio.

Once the service focus and mind-set is achieved, the product and service teams can be brought together again as one entity. Services become a cross-enterprise priority with processes focused on the whole value chain where product ownership is used to enhance competitiveness and value creation. Product quality and reliability data are used to improve the service offering and maximise the return from the service portfolio. Market leaders are enhancing their services portfolio in collaborative business models with ecosystem partners and are shaping their industry through service innovation. The co-development of highly integrated services solutions and the extension of services to focus on the customer process and outcomes will further drive operating profit growth.

For a successful transition from products to services, key capabilities in innovation, commercialisation and service delivery are needed. Growing the service portfolio through innovation requires a customer-centric approach from ideation to implementation with a focus on speed and scale, cross-functionality within the organisation and open collaboration with partners, investors and suppliers. Selling services requires a shift in commercialisation capabilities with a focus on value selling. Selling outcome based services is typically a much longer cycle and involves a broader, more senior group of customer stakeholders as the focus shifts from selling to maintenance departments to the asset operator/owners. Ultimately, service delivery is critical to success and capabilities need to be established across core processes: customer management, service supply chain, service operations, partner management, engineering and digital enablement to become a ’service leader’.

Get started now: understand your customer’s service needs and where you can add value, re-assess your company’s services strategy and portfolio and determine how your service capabilities need to shift to achieve profitable growth.

PETER VICKERS, Director, Deloitte Consulting

PHILIPP MERKOFER, Senior Research Analyst, Deloitte AG

References:

Deloitte Insights, Selling Industry 4.0. The new sales mind-set for connected products, 2018