Saturday 30 November 2013

What is Servitization?

I've had a couple of occasions in the last week where I've used the word "servitization" - either in a presentation or an article and someone has responded by saying, "so what is servitization". Given the frequency of the question I thought it might be worth writing a short blog to explain what servitization is and where the idea came from.

In essence servitization is a transformation journey - it involves firms (often manufacturing firms) developing the capabilities they need to provide services and solutions that supplement their traditional product offerings. More formally, my colleagues and I at Cranfield University defined servitization as "the innovation of organisation’s capabilities and processes to better create mutual value through a shift from selling product to selling Product-Service Systems". Two other definitions accompany this: (i) the idea of a product-service system - "an integrated product and service offering that delivers value in use" and (ii) a "servitized organisation which designs, builds and delivers an integrated product and service offering that delivers value in use".

It is worth unpacking these definitions a little, but before I do, let me give a couple of practical examples of servitization. The first, and classic, example is Rolls-Royce selling "power-by-the-hour". Instead of selling aero engines, Rolls-Royce now contracts with many of its customers for "power-by-the-hour". In essence the customer buys the power the aero engine delivers and Rolls-Royce provides all of the support (including maintenance) to ensure that aero engines can continue to deliver power. This shift in business model is important because it means the interests of clients and providers are much more closely aligned. In the olden days Rolls-Royce used to make money on time and materials - basically repairing engines. Put crudely the worse the engines were, the more maintenance they required, so the more money Rolls-Royce would make. Of course customers don't want unreliable engines that are always in the repair shop. They want reliable products that - in Rolls-Royce's case - allow planes to fly safely.

This same trend - selling solutions rather than products - can be seen in lots of industries. In healthcare, for example, many pharmaceutical firms are under significant pressure. The cost of developing drugs is increasing, many of the traditional drugs are coming off patent and so the generic manufacturers can move into the market. As a consequence pharmaceutical firms are rethinking their business models - defining themselves as healthcare solutions providers. Think like a patient - most of us don't want the products that pharmaceutical firms provide. We'd prefer not to be ill in the first place. So if someone can provide healthcare solutions, which reduce the likelihood of illness, the interests of providers and customers are again much more closely aligned.

So let us return to the definitions. To make this transformation - to sell services and solutions - requires significant change inside many traditional manufacturers. They have to recognise that the product is a platform to deliver a service. They have to build solutions that deliver the outcomes their customers want and value. In essence these solutions are often capture in product-service systems, combinations of products and services. Customers only realise value from these when they actually receive the service - hence the concept of value in use.


Servitization as a word has been around since the late 1980s. The most frequently source article is cited as Vandermerwe, S., & Rada, J (1988) "Servitization of Business: Adding Value by Adding Services", European Management Journal, 6(4), 314–324. An article that appeared, but has only relatively recently been getting more attention in the broader academic literature and business press. A recent high-profile example, is UK Government's Foresight Report on the Future of Manufacturing - which identifies servitization as a core element in its vision for the future of manufacturing.


If you'd like to know more about servitization and my latest thinking on the topic why not join me for the Cambridge Service Design Programme: Making the Shift to Services - scheduled for 6-7th May. It would be a pleasure to see you there.

16 comments:

  1. Great posting. And congratulations on the CMR article that just came out.

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  2. Excellent explanation. Thank you.

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  3. Excellent explanation. Thank you.

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  4. Yes. excellent explanation. I found this term on the a book titled value proposition design, but i cant get nail that.

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  5. A new concept to me and well explained. Thank you, Andy!

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  6. Servitization is the direction to go for manufacturers. Thank you for the blog.

    Dr. K. Ragunathan

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  7. Thank you very much! It really help me for my research. Hope can get more of your articles.

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  8. Thanks Prof. Neely for the clear and easy to understand explanation of 'Servitization'; how would you conceptually apply this concept to poultry products?

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    1. Hi Nazzim - thanks for the question. It would depend on whether you were providing poultry products to supermarkets (or other stores) or providing goods to support farmers rearing poultry products. In the case of the latter you might imagine a model where the provider offers a guaranteed availability to the retailer - the provider monitors stock levels in store and ensures the retailer never runs out of product to sell. In the case of those providing equipment to the farmer you could focus on machine/equipment availability, provide infrastructure to allow the farmer to monitor the chickens - egg laying patterns, weight gain, etc. Ultimately its about understanding the outcome your customer or your customer's customer is looking for and working out how you deliver this.

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    2. ericvdsr@gmail.com4 October 2016 at 03:10

      Indeed, thank you prof. Neely for your clear definition and the related examples. I can add an example related to my company, D'Ieteren: we are the importers of all cars from the VW Group in Belgium. Besides just selling cars, we offer to our customers a "We Care" contract, which for a modest amount/month guarantees all maintenance and repair operations, so that the customer always has a "tool" to be mobile that works. Regards. Eric Van der Stichelen HRD D'Ieteren Auto

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  9. Good opportunity for manufacturer to increase revenue

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  10. Hi Prof. Can you please expalin how Servitization could be applied to the financial markets? And Is servitization differs from the (after-selling service)?
    Thank you in advance

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  11. very clear explanation Prof. Neely, thank you! Do you see that this concept can be applied to the built environment thinking of the building as "product". There are many existing services in the operation of the building, however the "manufacturer" (design and construction firms) do not take part in those services.

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    1. Hi Francisco - absolutely, in fact there are efforts by some building firms to servitize. Think of BIM (building information management) - efforts to create digital footprints of buildings that can be used to monitor the state of buildings across their lifetime. Some construction companies have moved into building and the leasing the buildings, capturing an ongoing revenue stream. I believe that servitization is a strategy that is open to any organisation providing complex, long-life span assets.

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    2. Hi Andy And Fransico - re buildings - A relevant example in AEC is public-private partnership - The classic one is where the contractor will operate the road for many years and get the toll booth money. Now we see similar arrangements for buildings. E.g Skanska are responsible for operating and maintaining the New Karolinska Hospital (their largest project ever) for more than 25 years.
      Another example related to existing building portfolios are Energy performance contracting. A MEP contractor will together with the owner identify possible improvements, set goals and guarantee results. If performance goals are not reached the contractor will cover the difference.
      We have seen similar situations in insurance where the insurer will suggest improvements and lower the insurance fee. Both parties wins as the risk and damages are lowered.
      I totally agree that the use of BIM and related for both new building projects and existing assets will open up for further evolvement of business model innovation related to servitization

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