This post was originally featured by Field Service USA.
This is the second post in a three-part series exploring the two incompatible business models that coexist in most field service organizations. In the first post, I described the incompatible business models in depth. In this post, I'll outline how some of the leading field service organizations are reconciling the diverging business models of field service.
How can service organizations align these models into a single model that rewards their best and highest margin customers, while encouraging their lowest margin customers to invest and improve? To answer that, we must first understand the crux of the problem.
The vast majority of equipment manufacturers organizations aren't selling what their customers are buying. This sounds like an inflammatory statement, but it's not: customers are buying a capability - which happens to manifest as a physical tool - in order to accomplish a task. Customers extract value from the capability each time they use the capability. Customers are buying value extraction, not tools and service contracts.
On the other hand, vendors & suppliers are selling capital equipment and service contracts. These two items are enablers for customers to extract value, but they are not perfectly aligned. For example, customers often have to invest hundreds of thousands of dollars - or in some cases millions - before they can extract a single dollar of value. Once a customer buys a piece of equipment, they have transferred all of the leverage over to the manufacturer by paying a large fee up front. Once the manufacturer has been paid, there is a lot less incentive to guarantee that the customer extracts the expected value from the system.
How can service organizations rectify this discrepancy? In a word, servitization. Servitization is a not a new concept, but one that is still only being pioneered by the earliest .1% of service organizations. It's a material shift from the traditional model of selling capital equipment and service contracts. So what exactly is servitization all about? It's about aligning what equipment manufacturers sell and what customers buy to be 100% aligned. It has material impacts on cash flow, revenue recognition, business operations, hiring, culture, and more.
Let's walk through a few examples of servitization to understand what exactly it is, and what the impacts are: What if airlines didn't buy planes, but rather paid Airbus for a certain number of flight hours, with Airbus supplying the necessary equipment to achieve the request number of hours?
What if hospitals didn't pay for MRI equipment, but bought a certain quantity of clinical hours per year? What if manufacturing facilities didn't pay for conveyer belts, but paid for hours of belt rotation? In each of these examples, traditional capex is converted into opex. What does this mean for the manufacturer?
1) The traditional payday from the sale of a piece of equipment now becomes amortized over the course of many years. This has serious cash flow implications.
2) Ongoing revenue from a sale indefinitely.
3) An incentive to ensure uptime at all costs.
4) That the solution needs to deliver value as quickly as possible; otherwise the customer will return the solution.
5) Solution vendors can generate more revenue per customers (over time) by providing a potent combination of equipment and associated service.
What does this mean for the customer?
1) No capital budgeting or capex.
2) Reduced risk associated with purchasing equipment.
3) Closer collaboration with the vendor.
4) Ability to return equipment without eating a massive sunk-cost.
But perhaps most importantly, the servitization model aligns incentives completely. In this model, customers pay as they extract value from the product, which means that manufacturers are incentivized to ensure that customers can extract as much value as possible. In this model, service organizations are incentivized to work with their customers to ensure success, rather than simply minimize service cost (whether by shaving staff or trips). Rather than look at service trips as a cost with no marginal revenue, service trips become revenue enablers for all customers.
So, what companies are implementing servitization models? How are they doing it? What are the outcomes? I'll explore that in the third post of this series.