A Deep Dive into Servitization - Part 2 - With Dr Parikshit Naik

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In part 2 of our series around the topic of servitization we once again welcome Dr Parikshit Naik from The Advanced Services Group to discuss the steps manufacturers needs take in order to implement a servitization business model - with real life case studies.

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Transcript

Niall Sullivan, Senseye: I'd like to sort of move the conversation, I guess, towards discussing the steps manufacturers have to take in order to implement the Servitization business model. So I guess that would be my first question. What are those steps? So what are the key considerations, especially around IOT as well and the types of platforms they should be looking to utilize?

Dr Parikshit Naik, The Advanced Services Group: Yeah. So with Servitization, and I mentioned the word Advanced Services before, so it might be of value to break it down of what it actually means. The process of Servitization, imagine it as say, a windy road with a lot of roundabouts as a roadmap. And this transformation, the outcome of this transformation is creation of a new business model.

Now this business model, we categorize it that, not the business model, but the services that this business model will provide can be of three types. One is base, intermediate, or advanced. Now base services are something that manufacturers very commonly provide, such as just delivering the product and product spare parts. Intermediates can involve things like repairing and fixing the product, assuring the maintenance. Now these two, quite a few manufacturers do that. They will fix it. They will assure you the maintenance as well. And another piece in intermediate is performance advisory.

This is where it starts getting really interesting and the data starts coming into process as well. Now performance advisory is about gathering enough data and creating insights in a way that you, as a manufacturer can help your customer extract maximum value out of the asset.

I'll give you an example, Truck & Bus. They started off with their Servitization journey and they created a driver grading system of A to G. And in that they would measure the breaking, they would measure cornering, the speeds, how the gear changes, how are the revolutions. And they started to create a grading system of how good a driver is on their truck. And they would give the driver tips to be better at driving and say that if you drive, you are at level F right now, if you do X, Y, Z things, you will be at level B.

What does that level B mean? You will save X amount of fuel over the year, which means thousands and thousands of pounds. And they would put that pound figure to it. And these are performance advisory services. And beyond that come Advanced Services where you start to guarantee the outcome of either your product. Guarantee the outcome of your process, or well guarantee the outcome of the process in which the product sits or guarantee the outcome of the business itself in which the product sits. And this is where we help a lot of our clients with, is that Advanced Services piece. Now, this transformation itself, as I said, is a windy road with a lot of roundabouts. And we see that manufacturers go through four stages in this transformation. First one starts with exploration where manufacturers really try and find out if this is the right thing for them to do and what it means to Servitize in their context.

Then the second stage is engagement, where they start testing their ideas about Servitization and advanced services, and start to get close to some of the customers they want to involve. Then we get into expansion. In expansion manufacturers start to commercialize this new value proposition, their new service that they have created and explore whether there is an opportunity to add more services if this one is working well. And in exploitation stage, the business would commit more resources and capabilities into the service business specifically, and then services become so integrated in that business that the organization starts to compete based on those services and using the product as only a platform to deliver those services. But it is not as linear as I explain that it doesn't go from exploration, engagement, expansion, exploitation. Those roundabouts are there to signify sort of troubles and challenges and some decisions that you have to retake and iterations.

And it is something you could say that at one roundabout, a manufacturer could take an exit where they go back in their route and take some steps back, or they could take an exit, which means that they have failed. And they have decided that this is not the right thing to do. Basically those roundabouts could be decision points where you realize something is working, something is not working or something needs to be done better. And that is how you go through that transformation. And it's slow. It takes a while, but that is how we see manufacturers going through this process, is part of this four stage transformation itself.

Niall Sullivan, Senseye: And you noted the different stops. And I think you also mentioned about, at a later stage putting additional resources in. I guess once you've realized the benefits of it, then obviously it's basic ROI, isn't it? That you'd put more resources in, but in order to do that, I guess you'd require buy-in from key stakeholders, various sort of levels. Can you just describe some of the key stakeholders that are pretty critical to have buy-in into this, to a Servitization project, or to move to that model?

Dr Parikshit Naik, The Advanced Services Group: Yeah. So to start with, I think the obvious, very basic stakeholders are the customers. You need to have the customers agreeing to participate with you in this co-creation. Sometimes even the customer's customer, the end customer, the end consumer. We also see key suppliers to the manufacturer coming on board because often when you are creating an advanced service, if your revenue model changes of how you're charging for your products, the money you get back comes in different forms as well. So the money you pay back to your suppliers needs to be communicated in the same way. So you need your suppliers to understand what you are already doing and often they need to say, "Yes, we would like to align our systems with yours as well," which would be ideal. But sometimes they do come to an understanding that they might change their payment terms, et cetera.

And well, there are many more that we could talk about, but the best way we see to identify these different stakeholders is conducting a value network analysis, where you look at the different stakeholders and what value they bring to the service offering. Not to you, but the service offering as such, and then try to see which ones you want to collaborate with first and how you want to go through those relationships. And then there are partners, which is really what is most interesting to me. These partners are new partners that manufacturers are not used to collaborating with because they've never had to provide services. So now to enable these services, you bring in new people who have certain experience and expertise, for example, technology partners. So the manufacturers may not have the capability to design an IOT suite or a platform.

And they bring in a technology partner. Example, again, talking about MEI Truck & Bus, the grading system that they created and the sensors and getting the data back, they didn't do this themselves. They had a company called Microlife who helped them do this, and they had their hardware and software to back it up. Another interesting partner is a financier. And it's very important to talk about financiers because not all companies can afford to have their assets sitting on the balance sheets. So how do you do this? A lot of companies use captive finance companies, their own captive financiers, such as Rolls-Royce.

Everybody talks about Rolls-Royce owned their engines. Well, the company that made the engines didn't really own those engines. They had another subsidiary, which was sort of a Rolls-Royce bank that owned the engines and leased them to the customer. And it was a three party agreement between the customer, Rolls-Royce, say Rolls-Royce bank, and the actual Rolls-Royce that manufactures the engines. So you bring in those different partners, and sometimes you also bring in third party, if not a captive finance, a third party financier. And we talk a lot to some of these financiers as well. So there's growing interest from their side to help manufacturers in this.

Niall Sullivan, Senseye: Sure. I was interested actually, when mentioned technology partners, bringing them on board. Because obviously centralized backgrounds or predictive maintenance, predictive analytics. What sort of role does that play in enhancing a Servitization offering to the end customer, I guess we're talking about here?

Dr Parikshit Naik, The Advanced Services Group: So I mean, as part of my PhD as well, I worked a lot on trying to understand the value of IOT in Servitization and predictive maintenance always came up. Now, as we said, they are one of the big stakeholders, technology partners. And digital technology itself is one of the key enablers that we talk about in Advanced Services. And it's most important role is de-risking the entire business model. If the business model is guaranteeing an outcome from a product, then it is the manufacturer's responsibility to ensure that the product firstly works. Second works at an expected performance level. And third works at an expected performance level for an expected amount of time. Now, how do we manage all of that? How do we make sure all those three components are guaranteed? And what does the business have in its arsenal to say that we can guarantee our product will do all those three components.

It needs to have data. It needs to have the analytics behind the data and an effective predictive maintenance program. To in a way guarantee that, well, we will know when the product is going to break down. There will be no downtime because we will have fixed it before it goes into downtime. And that really becomes a key part of the contract. And why I call it de-risking is because it relates to the revenue model as well. So, if you have a financier who you have told that we are going to guarantee the outcome of this product. The financier will ask, "How can you so confidently say you can do that. What do you have to show me that will convince me that I can put my money on this?"

And when you show them that I have this predictive maintenance program, which guarantees that this product will never break down, which means the customer will always pay for the outcome, which means you will always get paid back your money that you've invested. That is when financiers do feel that it's not that risky. They are there to take over risk, but obviously they don't like too much risk. They want you to de-risk the model as much as possible. And that's where we see programs like predictive maintenance and well preventive maintenance, a lot of manufacturers already do. But predictive maintenance, AI, and IOT are helping really to de-risk the business model.

Niall Sullivan, Senseye: And it was actually mentioned, I don't want to turn this into sort of a Senseye sales pitch. That's sort of the opposite direction of where I want to go. But just because you talk about de-risking and financiers, what guarantees that certain metrics will be met? And it's because Senseye offers guaranteed return on investment backed by a reinsurer. So I mean, that type of initiative, I guess, would really work within that Servitization.

Dr Parikshit Naik, The Advanced Services Group: Yeah. So, you guys see it in your industry as well, don't you?

Niall Sullivan, Senseye: Absolutely. Yeah, yeah. Yeah, so it's just guaranteed in that so-called risk, I guess. Yeah.

Dr Parikshit Naik, The Advanced Services Group: Mm-hmm (affirmative), yeah.

Niall Sullivan, Senseye: So obviously you said about the journey, different roundabouts. I want to add another, quite funny, maybe quite funny analogy. And so, there's bumps in the road, I guess. And I'm going to sort of say the bumps in the road are the people within an organization, I guess, with any project, like predictive maintenance, Servitization, whatever it might be. There's always going to be people who are resistant for whatever reason, whether it's a cultural thing or I don't know. But how do you overcome any sort of resistance to Servitization within an organization? I guess de-risking is one area, but are there any other areas, I guess?

Dr Parikshit Naik, The Advanced Services Group: Yeah. We see that as a big challenge in our work with businesses as well, that internal communication and buy-in is just as important as demonstrating value to the customer. It's almost like if you are a champion within your organization, you have to convince the customer, this is a great idea. You have to convince your bosses and the board as well, that this is a great idea. And it is really critical that you get support from the senior management to your Servitization initiator. And this often starts, as I said, with a champion who believes that this is the right thing to do and has the potential to communicate this to all the stakeholders that this is the right thing to do. And we help a lot of our businesses communicate this through visioning exercises. So really, if you can understand the business model that you are trying to create, then you can create a vision and mission around it.

And hopefully that vision and mission helps you communicate the idea and the value that you can create, not only for your business, for the customers as well internally. And another complimentary way of doing, well, quite an interesting and funny way as well is storytelling. And we've seen that work wonders and where you will have say champions who want to go to their bosses and convince them that this is the right idea to go through. But how do you convince them? Well, you could bring in a story of how there are heroes, there are villains, there are allies in the story of Servitization. That you're trying to leave this existing world of yours, which is not nice, but the future doesn't look great. And you're trying to achieve a different world, but there are bumpy roads, as you said, and roundabouts. And how does the hero go through this?

Are there mentors that can help them achieve that? Are there allies like partners who can help them go through this journey, and you build that story around it. And it's not something that has come up in somebody's dreams, but this is a very research led tool, which has been used by the likes of Steve Jobs. And if you see Steve Jobs's interviews and his press releases of iPhones, you can break down the way he talks about a product into these. And also in the narratives of movies like Star Wars. If you think about Star Wars and the different allies of the heroes, they've been broken down in these parts as well, of how does a hero go through this journey of trials and tribulations, et cetera. So, we do see that as a big challenge, but there are ways to communicate the vision, mission, and the story effectively. Yeah.

Niall Sullivan, Senseye: I won't try and get you to identify who's Darth Vader in the piece. Yeah, because you mentioned about the partners of the allies and about the heroes, but who would be the villains then in this particular piece, in this context?

Dr Parikshit Naik, The Advanced Services Group: Well, we do call them villains in a way, but another, I would say, tactful way of talking about them would be, well, not really tactful, but would be value network predators. That doesn't sound nice either.

Niall Sullivan, Senseye: No it doesn't. No.

Dr Parikshit Naik, The Advanced Services Group: Yeah. So for example, if you were a boiler manufacturer, who's providing boilers and who now wants to deliver heat as a service. And you see that you're getting a lot of data from your smart home heating devices, et cetera. Who else does these home heating sort of equipment and who gets a lot of this data back? Well, it's the likes of Amazons and Googles, the tech giants. And we see a lot of these tech giants getting into the space that a lot of these manufacturers are trying to get into as well.

And at the same time, people like British Gas, they have so much power and control over the supply chain in the gas industry. So people like them can be understood by some manufacturers as the predators or the villains. Now it doesn't mean that you have to kill the villain in any way at the end of the story, but sometimes you also realize that you have to collaborate with these predators as such, because it adds value to you and it helps you keep control of some of the market as well. But, yes. So there are some of these villains or predators.

Niall Sullivan, Senseye: Yeah. Better stay clear of that, which large companies we see as villains or be careful of that, but no, no. What I was going to say, that's interesting. So I know you mentioned right at the very start, I guess in our first episode about you work with small and large businesses. And I guess each will have their own challenge as they approach and implement a Servitization model. Could you just talk us through the differences between the two, if there are differences between the two approaches, I guess?

Dr Parikshit Naik, The Advanced Services Group: There definitely are some differences that we see, especially with the pace of transformation, how quickly manufacturers adopt certain changes, how much resistance there is internally. That is something we see with SMEs, that when we talk to them and when we are helping them through it, we are talking to the managing directors and the CEOs straight away. So the change is really pushed top down. But when we are talking to very large companies, we have these champions who are somewhere in between the board and the very operational level of staff. And it can be harder for them. It can be slower as a transformation. Also, at the same time, these large organizations, as an entity are quite rigid to change because there's so many elements to change. Smaller ones are faster to change, but then the large ones get customer attention quicker because they have the brand value that comes with it.

Because if, for example, Baxi says, "We are going to do heat as a service. How many of our customers would like to sign up?" If they send a text, they will get quite a few texts back saying, "Yes, let's give it a go." But a small company who has just got into boilers, if they send that, it is going to be tough to get traction. So we do see some of those challenges, but the biggest challenge that we see in all businesses, small or large is coming down to the business models and how things stack up together. Now, I've talked about business models a lot, but what we do to help a lot of manufacturers understand business models is break it down into really four things. So we break it down into four components, four mechanisms. One is the value proposition itself.

So what is the service you're providing. Second, how do you deliver this service? So the service enabling system. Third is the value capture process. How are you earning money from it? And the fourth is the competitive landscape. So all these first three components working together to help you achieve competitive advantage and capturing the influence of your competitive landscape. Now all these four mechanisms really need to stack up properly so that the Servitization initiative itself is successful. A value proposition designed to deliver or say guarantee the outcome of a product needs to have a very complimentary and supportive value capture process, the correct revenue model for it. And at the same time, it needs to have the right service enabling system, such as the correct partners, the different technologies, different facilities and skills. So all of these things need to stack up. That is one of the biggest challenges that we see.

Another one, I would say specifically, going into the value capture process itself of revenue models. Often manufacturers think that well, Servitization is X pounds per R of my product. Well, no, you're not just renting the asset, there's much more than that around it, which is why value capture is only one component out of the four. So if you want to create a revenue model, there needs to be a really strong case of the value proposition around it and linking it all together. And also subscription of X pounds per month or per quarter or per year is not the only answer to everything. There are different forms of revenue models. For example, when we did the work with Koolmill, the milling company, it wasn't about, you can have this machine for two pounds per running time. It wasn't that way. It was about the outcome being delivered.

The outcome is good rice. And if the differentiating factor of Koolmill that was that we can reduce the waste in rice, then the outcome is that you only pay us for every kilo of good rice that you get. Between that, don't worry about it, all the electricity, all the maintenance, everything we'll take care of it. We will guarantee that if you put five kilos of paddy into the machine, you will get at least four and a half kilo of rice coming out of it. And at that guarantee, if we guarantee that you only pay for that four and a half kilo of rice that comes up. And that is what really made it all stack up within the business model.

Niall Sullivan, Senseye: Oh, I feel that's really interesting. I guess another thing you mentioned, the thing you might have mentioned earlier, we didn't go into too much detail, but it also was very key is how important cultural change is within these projects as well. Could you talk a little bit about that as well?

Dr Parikshit Naik, The Advanced Services Group: Yeah. Have you heard of Peter Drucker?

Niall Sullivan, Senseye: No

Dr Parikshit Naik, The Advanced Services Group: Right. So Peter Drucker, he was a famous management scholar, guru consultant. And some even called him as he invented management to some extent. But of all his famous quotes, a lot of people love his quotes, was culture eats strategy for breakfast. And I think that stands true for any transformation, whether it's business more Advanced Services or not. But we see that definitely in our area as well. That culture plays a very big role in encouraging innovation, in accepting change, fostering entrepreneurship within the organization. But we all know that. We all know culture does that. What really is the case in Advanced Services that makes culture even more special is the change of mindset from selling products to selling outcomes. And if that mindset doesn't change, the Servitization initiative can really come down, collapsing at the very last minute and it's tragic. It is absolute catastrophes and we've seen those. And it sometimes also helps speed up the processes that some customers take years and years, and some customers take very little time to move through it.

And one of the things that I remember hearing from one of the senior execs whose initiative collapsed was that they went to their head of the finance towards the end of the journey of the map that they had, the project plan they had created. They had discussed a bunch of customers who were really interested in going with it. They said, "Yeah, let's sign some contracts." And the head of finance said, "Well, this is all nice and pretty. I'm glad these customers will stay with us for five more years," because that was the duration of the new contract. "But how many machines will they buy in these five years?"

And that's where you realize that, well, they just didn't get the message that we are not trying to sell more machines. We are trying to maintain long term relationships or sustainable financial income, where you don't look at the spikes in your balance sheet, but rather have a clean income of something coming every month or every recovering period of time. And that company's initiative just collapsed. The entire division was let go. That person was fired as well. So that is, I would say a very good example of how important culture is. If the culture is still stuck on selling products, there's not much you can do beyond that. You have to first change that in order to get that strategy working for you.

Niall Sullivan, Senseye: Oh, absolutely. And it's very much the same in predictive maintenance projects as well. It's so important. And like I said, any digital transformation project is so important.