What is servitisation and how can manufacturers achieve it?

While Industry 4.0 and smart factory processes are transforming the way goods are produced and distributed, the Industrial Internet of Things (IIoT) is changing the way manufacturers sell their products and interact with customers. Servitisation offers manufacturers a chance to stay competitive in a rapidly changing marketplace. Rather than just selling a product, manufacturers can leverage connectivity and cloud computing to sell a product-as-a-service.

In a servitisation model, the manufacturer can transition from selling a machine to selling services, performance and uptime. The manufacturer can also use connectivity to make it easier for the customer to purchase consumables, services and product upgrades.

By integrating sensors and connectivity, a manufacturer can add and adjust services through the entire lifespan of a product. With a direct channel to the customer, the manufacturer has the chance to monitor feedback data and apply that data to continually improve customer experiences, increase customer interaction and develop new business models.
 

For many manufacturers, servitisation begins with offerings related to the monitoring, maintenance and service of a product in the field. Predictive maintenance not only improves uptime for the product owner, it can increase efficiency through the entire supply chain.

For example, the failure of a single component in a drilling rig could result in production stoppage at a mining site, leading to massive amounts of time and money lost. Sending a technician to service the rig in a remote location requires a considerable amount of time and resources. If the service provider doesn't have the necessary component in stock, sourcing the part could take weeks or months.

With predictive maintenance, the drilling rig manufacturer can monitor usage and apply predictive algorithms to determine when specific components will need maintenance or replacement, allowing the local service provider to plan on-site visits based on need. When the service provider knows what spare parts their customers need and when they need them, they can better manage inventory and provide better overall customer service.
 

In a consumption-based model, a paper towel manufacturer might give a facility management firm 'smart' paper towel dispensers for free (or at a below-cost price) as a loss-leader. Along with the dispenser, the paper towel manufacturer provides back office inventory software and a smartphone app.

The sensor inside the dispenser detects when paper towels need to be replenished, triggering a notification to the cleaning staff sent via the manufacturer's app. This leads to improved staff efficiency and customer satisfaction for the facility management company.

The back office software keeps track of when dispensers have been refilled and reconciles that against the firm's overall supply of paper towels. When inventory is low, the purchasing manager will receive a prompt to place an order, keeping the customer in constant contact and reducing friction in the purchasing process.

In this model, rather than buying a product outright, the customer pays on a per-usage basis. Such models use a service-level agreement (SLA) between customers and suppliers to guarantee performance.

The pay-per-use model is an essential part of the so-called circular economy, in which the service provider is motivated to create durable solutions, as opposed to relying on planned obsolescence as a means of generating revenue.

With the help of cloud computing, the performance of a product (such as a vehicle or construction equipment) can be optimised continuously via over-the-air firmware updates, lengthening the lifespan of the product. Such a model can help both the customer and the supplier align with the Sustainable Development Goals set by the United Nations.

For most manufacturers, digital transformation won't happen overnight, it will require a period of trial and error, and the flexibility to 'fail fast' – learning from mistakes and pivoting quickly.

In his book The Amazon Way on IoT, John Rossman suggests enterprises should think big but start small. When defining how to transition, Rossman suggests companies should execute a number of small experiments to find out what works best.

At an organisational level, experimentation doesn't mean an entire business needs to transform overnight. Keeping with the adage of starting small, enterprises can create innovation-focused squads who serve as evangelists for the rest of the company. An effective innovation squad should take a multidisciplinary approach, incorporating insights from product, marketing and sales teams.

Given the deeply transformative nature of many new servitisation models, getting expert advice from outside one’s own organisation can also be very helpful for this type of diversification. This is the idea behind the company HDI TH!NX that is working together with HDI customers to help them get the most out of emerging possibilities in connection with the Industrial Internet of Things. These activities involve not only the collaborative development of new insurance products and services based on the IIoT but also insurance solutions for IIoT-enabled products themselves.

As a new unit of HDI Global SE under the direction of Dr Verena Brenner, HDI TH!NX brings together a multidisciplinary team that puts a strong emphasis on agile working methods for swiftly developing new approaches to support IIoT products and applications as they come into use. “We want to support our customers with this transformation process from the beginning,” remarks Brenner. “As we know, first-mover advantages can have a significant impact in online contexts.” Working in this way, it has been possible to quickly identify joint-use cases with industry partners as part of a process of developing new solutions, as in the cooperation with HDI customer Schneider Electric, a worldwide energy management company that operates an IIoT platform.

Before jumping on the servitisation bandwagon, a manufacturer should first determine the financial risk of adopting product-as-a-service offerings. Adding sensors and connectivity capabilities to some products may not be financially viable. Even if the manufacturer is ready for digital transformation, their customers may not be.

Risk related to cybersecurity should also be considered by both the manufacturer and the customer. The more connected devices a company deploys or makes use of, the greater their attack surface becomes. In order to mitigate risk related to business factors, cybersecurity and regulatory compliance, businesses should consider a professional risk assessment before adopting any new business models.

As industrial methods are transformed through digital innovation, business risks and our understanding of them are also evolving in new and different ways. This creates new possibilities for risk consultation and risk mitigation as well as the need for new types of risk cover. “IIoT is opening up many new possibilities and approaches,” points out Verena Brenner. “Together with our customers, partners and colleagues, we are reconceiving insurance to protect and enable IIoT-driven business models.”