A Deep Dive into Servitization - Part 1 - With Dr Parikshit Naik

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Today we launch series 2 which is based around the topic of servitization. To help us dig into this topic we welcomed Dr Parikshit Naik from The Advanced Services Group, which provides education, training, research and access to a global network of like-minded professionals around advanced services and servitization.

In this episode, we discuss what servitization is and why manufacturers should introduce this business model. 

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Transcript

Niall Sullivan, Senseye: So first of all, I'd like to welcome Parikshit to the Trend Detection podcast. First of all, how are you doing? And yeah, busy at the moment?

Dr Parikshit Naik, The Advanced Services Group: Thanks man. Yes, it is busy. We are trying to stay healthy, trying to stay safe. And, while being busy, we have transformed a lot over the past year. And, at the same time we're trying to help our customers, as well, transform and be resilient for future challenges.

Niall Sullivan, Senseye: That's really exciting. Well, me and the listeners, I guess are looking forward to hearing more about that definitely. So, on that note actually, I guess it'd be really good place to start for you to sort of introduce yourself to our audience and sort of your organization as well, the Advanced Services Group.

Dr Parikshit Naik, The Advanced Services Group: Hello everyone, my name is Dr. Parikshit Naik and I'm the business development manager at the Advanced Services Group Limited. The Advanced Services Group, as the name suggests, is an advisory group that focuses purely on helping businesses compete through advanced services and servitization. We are a spinout from the Aston Business School, which is home to our center of excellence on servitization research and practice. And this center is led by some of the world's highest sighted scholars in servitization. And I was part of this center during my PhD, which focused on the role of Internet of Things in servitization. And as an advisory group, we have now worked with more than 400 small and large businesses. And helped them achieve basically differentiation, new revenue streams, profitability and financial sustainability through services, especially advanced services, which we'll come to what that means later. And as a group, we use proprietary tools and frameworks to help our businesses achieve this complex word and transformation itself called servitization.

Niall Sullivan, Senseye: Actually, yeah. I mean obviously servitization is the big topic of this podcast. I mean, it'd be interesting to know actually, first of all, what type of organizations do you work with?

Dr Parikshit Naik, The Advanced Services Group: We primarily work with high value, original equipment manufacturers, so OEMs. And by high value, I mean, not just monetary value, but the value of the product in its lifecycle, a very long lifecycle. It sort of comes from the trailblazers of servitization being Rolls-Royce, being a very high value product, millions and millions of pounds of engines that go on airplanes being produced. And they having set the standards and sort of the idea of servitization. The OEM sector is the first one to pick this up, which is what we work with the most. But we also work with now small businesses, where the value might not be that much in terms of monetary value. But the value for customer is what really matters.

Niall Sullivan, Senseye: So yeah, I know you mentioned Rolls-Royce there as a sort of a trailblazer. I think later on, a key thing we'd like to cover actually is around the specific case studies as well. But I think actually, to bring it right back to the beginning, you mentioned the keyword there, servitization. So I think it'd be a good place to start to actually define what servitization is for those who don't know. You probably heard that term a thousand times in a day maybe? I don't know, but yeah. So, but just how does it work and sort of, I guess, where does the term originate from as well?

Dr Parikshit Naik, The Advanced Services Group: Yeah. It is a complex word, isn't it? And people often ask us, "Why do you use such a complex term? Nobody wants to talk to you anymore." The thing is, it is a word that originated in academia, in the US. Coined in 1988 actually. They explained it at the very start as a shift of manufacturers, moving away from selling just products to selling a bundle of products and services together. And over the years, research and practice have both moved on and evolved and learned more about it.

Now, more examples from practice have come up and scholars have refined what it really means, what the definitions behind this term are. And now we, as Advanced Services Group and the wider practice and academic community as well, now we widely understand this as a transformation, essentially, of manufacturers that go through from becoming product-focused to a more customer and service-centric organization. And no more being identified as a pure product supplier. So you become more of a service provider or service partner rather than a supplier of products. And that is pretty much what servitization is.

Niall Sullivan, Senseye: Yeah. So you mentioned the name of the two people who sort of invented that. So what's their sort of background, I guess? Just about bit more context, I guess, around that.

Dr Parikshit Naik, The Advanced Services Group: So both were academics at that time, are still academics. They were in Switzerland. I'm not entirely sure of the university, but they were both in Switzerland when it was created. Now Sandra Vandermerwe herself, I think is somewhere in Northern Europe, I think so. Don't count me on that, I'm probably wrong. But yeah, she's a distinguished professor herself in servitization and business consulting. And they both have been in the field for years and years with a lot of experience with manufacturing firms and helping them transform in general around services.

And this is where, in 1988, they realized there was a clear shift of manufacturers realizing that, if we want to go past this cutthroat competition on who makes the cheapest product and cuts the most costs, we need to stop thinking about products themselves. They need to start thinking about what more can we do with these products and well services. Because there is also a higher profit margin and it gets you closer to the customer. So it was a sort of a mentality shift and a cultural change as well that we'll talk about later. But yeah, there's those things I think sparked the creation of the word.

Niall Sullivan, Senseye: Yeah. And actually that leads nicely into my next question actually. So, we saw throughout the shift from product to service. I guess, a good question would be, what are actually the benefits of servitization to a manufacturing business?

Dr Parikshit Naik, The Advanced Services Group: Right. So servitization specifically what we call, advanced services, we can go into the details of what these different services are. But advanced services saying the most complex type of services very outcome-based services, are beneficial to pretty much the entire triple bottom line, say people, planet and profit. So if we look at people first, and I'll pick an example actually for this. So I've worked on an innovative, tech project with a company called Koolmill. They produce high value rice milling machines. And their aim of providing their rice milling machines as a service contract, we call the service milling as a service, was to make high technology and cutting as technology in milling accessible to more and more people who really can't afford this very complex and very expensive technology. Especially in India, China, Philippines, Cambodia. And the industry itself has been using really old and antique pieces of equipment for generations.

And it hasn't moved on also because a lot of the very high value creating or high tech equipment are owned by very large millers who just buy rice or whatever cereal is from these people at very dirt cheap prices and process them. So it was to help these people gain access to the top of the line technology in rice milling and make sure that they get maximum value out of their own farms. Because they are the ones growing all the paddy and rice. So that was a quick example of impact on people. Another one that we're working on is-

Niall Sullivan, Senseye: Sorry to interrupt at you, just on the example. So it's just really interesting, because you said that they didn't have access to the technology. So what were they using before? You said it was quite outdated antique. So what sort of technology were they using before?

Dr Parikshit Naik, The Advanced Services Group: So it is still mechanical forms of rice milling, they're still machinery. But they are very much based on poor quality equipment, which almost, if we think of five tons of paddy that is being fed into the machine, it is expected that it will give you substantial amounts of rice outside. But these machines almost break down 50% to 60% of the rice into waste and you only get 40% yield. So that's a waste of rice, a waste of revenue and really bad for the environment as well. Because you are using the environment to create this much rice, this much Paddy, but you're not actually creating value out of it.

And now with the Koolmill's machines, Koolmill we were able to bring it down, the brokens and the waste to almost less than 15%, 16%. But obviously it is so high tech that it's expensive and it wasn't really affordable to anyone. And advanced services these type of business models made it accessible. Because now the farmer didn't have to worry about putting in a capital cost towards a 60,000 pound machine, but they were thinking about, can I pay for every kilo of rice that I get at the end? Well, yes, I can pay for that. And do I have to worry about the maintenance and upkeep of this machine? No, Koolmill will worry about that. So it immediately made sense to them that, yes, I think I can mill my own rice now. I don't have to sell my paddy to some big company and give away all the value. So that is how they've been doing it. And [crosstalk 00:11:25] just another example from Baxi. I think might be quite familiar to the UK population who have boilers at home. Baxi is a domestic boiler manufacturer.

And we are trying to create heat as a service propositions with them as part of another government funded project. So in that another people angle is trying to address fuel poverty. And making sure that people don't have to worry about putting in a lot of capital equipment behind the boilers and worrying about the maintenance and this and that. But bringing it together into one single price that makes it more accessible for them and not to have to worry about, can I pay for the fuel bills or do I pay for my groceries and trying to address some of those issues. Not entirely solving the big problems, but at least contributing in a certain way to making people's lives better. But yeah, that's the people side, there's also planet side. So with the same question about Koolmill, as I said, food savings and reducing the waste created by these milling processes, there's a big impact on improving carbon emissions and waste, etcetera.

And also with Baxi, it would bring in cleaner technology, for example, heat pumps. Now we see that they're being subsidized to up to 5,000 pounds by the government, so that we can buy heat pumps. But with these contracts, they will become almost technology agnostic or product agnostic. It wouldn't matter if it's a gas boiler or a heat pump, Baxi will make the effort to put the best equipment possible to deliver the heat for the least cost and the best, and for the least emissions coming out of your boilers. So heat pumps will become more accessible at the same time and better for the environment. And.

Niall Sullivan, Senseye: Yeah. Just on that point, actually, so it's interesting you made that sort of buzzword sustainability. I mean our previous series was all around sustainability manufacturing, it's a big topic in most industries, particularly manufacturing. You've given a good example there, are there any other examples of how servitization can help businesses meet their sort of sustainability targets I guess?

Dr Parikshit Naik, The Advanced Services Group: We are looking into that as well at the same time, that how can we measure the impact to servitization towards achieving those sustainability targets. It is not as clear as of now it's growing field, but at the same time, the concept of servitization itself has very big overlaps with the concept of circular economy. And a lot of the business models are very similar and quite share a lot of mechanisms between them. So there is definitely a positive impact on helping manufacturers reduce their carbon footprint and their emissions. It also comes down to how they interpret the value of servitization.

A lot of the times manufacture think that now that we are providing services, it will mean that do we actually sell more products or do we sell less products? And there is that difference that, well, you're not really trying to sell more products under the same service contract, but you're trying to extend the life cycle of the same product for a really long time. Because it's in your interest as a manufacturer as well if you are responsible for the product, that this product lasts as long as possible. Which means you dematerialize the supply chain, you produce less products, you make sure that they work on the best possible outcome. So yes, it can have those very good impact on the environment as well.

 

Niall Sullivan, Senseye: Yeah. No. I mean it's clear there's a lot of benefits involved in implanting sort of servitization model. But are there actually any risks involved as well would you say?

Dr Parikshit Naik, The Advanced Services Group: Well, it's not risk-free. I won't say it's at all risk-free. So as a journey itself is, it has quite a lot of challenges that manufacturers come across. And it is after all about absorbing risks between the partners who are best placed to absorb that risk. Now, one of the biggest risk is not understanding customer requirements properly and which is what we come across a lot is manufacturers don't acknowledge the pains of their customers. And there's a sort of a disconnect between technology push and market pull. And if you're trying to sell something that is not really addressing the customer's pains and we see that several customers push out digital solutions because everybody's doing it. But does your customer really want this technological solution or a digital solution? How does this add value to them? It might add value to you, it might make your processes more efficient. But if you can't demonstrate added value to the customer, there is always the risk that your servitization initiative will fail down the line.

And is your customer struggling to pay for the equipment? If not, then don't try to put it on a subscription level, because then you are just subscribing to the subscription economy because everybody's doing it. But it's not really solving a lot of the problems. So it is about identifying what really hurts them the most and what keeps them up at night. And see how your capabilities as a manufacturer can help address those, can help make their life better. And then add something on top, that is where value added services would come in. And another risk is always assuming that servitization is a journey you can do by yourself. Just like we are saying that there is a best party to absorb the risk in certain places, a manufacturer might be the best person or the best party to absorb operational risk. But then it comes to say financial risk, can you actually have the assets sitting on your balance sheet?

Can you absorb that level of risk? If not, it is very valid to be in a partnership with the financier. And there are more and more financiers who are now interested in this. And similarly with IoT and digital platforms, are you as a manufacturer having the right capabilities to create your own IoT platforms to create your own digital platforms? Maybe, maybe not. Is it really wise to do that? Consider partnering with digital experts. There are so many experts who can help you create those digital platform, create those IoT suites connections, get that data back. And they are the expert in this, so why not let them help you with that? So I think those are some of the key risks that we come across.

Niall Sullivan, Senseye: That's really interesting though. Thank you for sharing.

So that was the first part of our series around servitization. I hope you enjoyed it. In part two we'll be discussing the steps manufacturers need to take in order to implement servitization business model with real life case studies. Please subscribe via your favorite podcast provider if you'd like to be notified about future episodes in this series. And let us know your feedback by leaving us a review. You can find out more about how Senseye can reduce unplanned downtime and contribute towards improved sustainability within your manufacturing plants by visiting Senseye.io. Thanks a lot for listening.