Servitization – an increasing trend driving manufacturing sales in Switzerland

With products increasingly commoditising and prices becoming the main competitive differentiator price erosion and margin pressure have directly impacted manufacturers. As a result, many manufacturers are transitioning from a product-centric model (‘selling products’) to a service model (‘selling an experience’), where services are offered for traditional products (servitization) or products are leased or sold on a pay-per-use basis (as-a-service). According to Peter Vickers, Deloitte Partner and industry lead for Energy, Resources & Industrials, “Margin is definitely a big driver to sell more services and key to that is being able to serve your customers properly. This can result in increased customer loyalty especially if those services are rendered under some kind of long-term service agreement. For example – in some industries service agreements can be 10-15 years depending on the life of the equipment.”

Customers are also choosing to outsource product management and maintenance to manufacturers, resellers or third-party service providers. Manufacturers now have an opportunity to integrate with customers’ processes by focusing on a service strategy to generate more value, higher margins and greater customer loyalty. A big advantage for the end customer is that if they move the servicing of the equipment that they bought to the manufacturer they can reduce their OpEx – for example, the number of maintenance engineers they need can be reduced. Customers can shift a big part of their fixed costs related to maintaining that equipment to a variable cost which is on the manufacturer.

Partnerships have become a key differentiator in servitization and as-a-service business. It is important to select partners carefully and optimise strategy to offer customers a completer and more competitive package. Services can be developed as a separate business line rather than simply being seen as an extension of a product.

Swiss manufacturers have already started with servitization

Moving away from product models towards service models is a trend that is closely observed by Swiss manufacturers. Most manufacturers already have an aftermarket service business to service the equipment they’ve sold to their customers. Additionally, we are seeing more customers moving towards the leasing model where there is no equipment sale in the first place – it’s either a subscription-based service or an asset as-a-service model.

Manufacturers don’t necessarily sell the machine but rather its performance output. They provide services to the customer and to the machine ensuring the machine will always deliver output as and when it is required. This allows customers to really optimise their investments through services that come together in inclusive contracts – including the machine, spare parts, services and even the consumables.

For example, in Switzerland ABB Robotics leases some of their equipment to customers. The customer doesn’t pay for the product anymore, they just pay for the servicing and use of the equipment. Hilti has been a pioneer in terms of the subscription-based use of their equipment where customers can sometimes even just pay an annual fee giving them the right to use whatever equipment they need for their construction work. According to Peter Vickers, “Servicing the equipment that companies have sold to the customer in the first place is a very common model. Many companies earn more than 50% of their revenue and margin from the servicing of that equipment. However, for many Swiss manufacturers pay-per-use models are not yet contributing more than 10% to their revenue.”

The biggest driver for the pay-per-use or asset service models is the maturity of the market or the customer. The fundamental change is from ‘I buy the equipment and then I have a service contract with you’ to ‘Give me the equipment and I pay you per use’. Most companies today are moving into the as-a-service business because they can’t make a high margin on their product anymore. Some companies, however, are just not able to embrace this model.

But they still face many challenges

One of the biggest challenges for manufacturers is whether the customer wants the pay-per-use or asset as-a-service model and is willing to pay for it. Often there is not enough incentivization for customers to use that kind of model. In some industrial sectors – for example oil, gas or chemical plants – there is already a bit more incentivization happening and the pay-per-use model is being explored.

Another challenge is to find the right business model that fits for both customer and manufacturer. Many manufacturers realised the increased need for servitization and as-a-service business too late. They started to invest in digitisation during COVID-19 to be able to continue to serve the customer. They equipped their service teams and customers with platforms to ensure remote sales and service and now they use this digital platform to build on and propose a new business model.

Establishing an ecosystem can also prove challenging. A solution needs to be found to finance the asset to make it easier for the customer. Manufacturers will need to find a partner that provides the financing and one that’s going to underwrite the risk. For the actual equipment they may also need to bring in other partners that are part of the value chain, like for example suppliers that can deliver an end-to-end service to the customer.

For many manufacturers it also remains a challenge to leverage the digital capabilities that they only started to build recently or that they are building. According to Josselain Prost, an experienced CRM and Digital Marketing Director at Deloitte, “The question arises of how to maintain uniqueness in the market and create a competitive advantage with the right technology. Digital capability needs to be leveraged to create new offerings and services that will deliver long term loyalty and the highest margin.” However, such differentiation and innovation will only succeed if it is based on a solid business that has the customer in mind.

What to do

• Define a business case: A business case needs to be defined for servitization and as-a-service business, identifying potential wins and what is the maturity of both the customer and manufacturer, as well as the market in general. This will help inform where to invest and what kind of return on investment can be expected. How to deliver the technology needs to be considered alongside what role the different partners in the supply chain would play.

• Build an ecosystem: The pay-per-use or asset as-a-service model is basically a new business model which requires different capabilities. An ecosystem needs to be in place to connect with the different partners. Billing and invoice capabilities need to be in place to handle the recurring revenue of a subscription-based service in a way that complies with financial regulation.

• Enable the right technology: Technology plays a big part because to service the equipment effectively you need to have the device connected through an IoT platform to ensure that you can use the data you get to drive a more efficient service operation and achieve better customer satisfaction.