Servitization, a Product as a Service Movement

Go back to the second video in this series, Purpose-built Industry Cloud in 2023.

Paul Gottsegen 

You said a word that doesn't roll off my tongue, but it has to do with something as a service. What was it? What did you say? Servitude? 

Prashant Kelker 

Well, I hope it's not servitude. It's servitization and it doesn't roll off my tongue easily either. It comes from the entire manufacturing industry. Some call it product as a service. Some call it X as a service (XaaS). Others call it servitization. It's the entire philosophy of saying, “look, I've not sold Paul an asset: I've not sold Paul a car. I've not sold him a battery. But instead I've sold Paul a car as a service. I’ve sold him battery as a service – which changes my relationship with you, Paul, completely. You're not someone who bought something from me. Now, you're someone whom I serve constantly. It just creates absolute havoc with current business models. 

Paul Gottsegen 

Well, you know, I'm in the research business, so I had to do a little research on this topic. I learned that the first the first example of this was in the sixties, a company that ended up being bought by Rolls Royce. So, it's part of Rolls Royce, called Bristol Siddeley. They took their Viper aircraft engines and sold “power by the hour.” So instead of selling an entire aircraft engine to an aircraft manufacturer, they would sell it as a service. And that way they could track the maintenance much better. And it was easier for the acquiring companies to afford it and pay for it over time.  

Prashant Kelker 

Exactly. And now you start seeing the advantages of this exact example. The same company, because they did what they did, found out that there was a lot more sand entering the engines when you fly over the Middle East. They wouldn't have discovered that if they didn't have this business model. And based on that, they had to redesign their engines a little different for planes flying over the Middle East. Right. These are the kind of advantages you have if you're going from just selling products to product as a service.  

But it also starts creating havoc with your balance sheet because suddenly you have not sold inventory, so the inventory is not off your balance sheet. That asset is still on your books. What does this do to your balance sheet? It could create havoc if you don't if you're not set up for this. But you also have revenue streams you could never dream of: instead of selling goods, now, you have annuity services, because I've just sold Paul Gottsegen an asset for the next five years. This could create wonders with your share price, because share prices value the net present value of future earnings. So, everybody is looking for annuity revenues coming from a product-heavy company. 

Paul Gottsegen 

I want to give you an example and see what you make of it. It's one I can relate to because my wonderful wife always wants me to change all our light bulbs to LED. When I go to the hardware store, I have sticker shock, and I'm scared to spend all the money up front.  

I found out that Philips has a deal with the Amsterdam Airport Schiphol, where they've replaced every one of their light bulbs with LED, but it's a servitization, so they didn't have to shell out all the money upfront. Meanwhile, they have the advantages from day one, and Philips probably sold way more in total to the Amsterdam airport than they would have in just a straight buy it as a product model. Is that a good representation? 

Prashant Kelker 

That's a great representation. And if we can now start seeing, if you take this example and say how does it actually reflect back within the enterprise Philips? What we suddenly have is people at Philips asking, “you know what, how is Paul using the bulb, or how is the airport using the bulb?” 

Now your bulb, which was your product, suddenly became your way of knowing your client. 

Paul Gottsegen 

Because IoT and sensors and analytics are taken advantage of in this model.  

Prashant Kelker 

Yes. But if you go back into the enterprise, you have two systems, you know, one system called product lifecycle management PLM, which you use for engineering the bulb. And you have another system for knowing what Paul or the airport wants and that's the CRM, that's the customer relationship management. Now, you tell me: f this connected bulb just tells you everything you need to know about the client, where does PLM stop and where does CRM start? Or is PLM our new CRM? 

Paul Gottsegen 

This sounds like a culture change or a mindset change. What have you seen, or what do you suggest – above and beyond just the concept – just to make that push? That's a that's a big change for any product organization to, you know, walk that plank. 

Prashant Kelker 

It is that exactly. And I know we say, “culture eats strategy for breakfast.” I'm not sure that's true. I think architecture does. We could have all the culture change we need and have the mindset we need. But if your PLM system's doing PLM and your CRM systems doing CRM, you could have any amount of culture change; your system is not supporting it. 

Guess what? You're doing what your system supports.  

So, as we look at PLM programs, CRM programs, we should come away from thinking in terms of silos. Instead, we should be saying, “how does my connected asset affect how I think about the client?” 

If we start with these four things, then we can at least define what culture change should achieve. We talk about culture change, but we never talk about the end state of what culture change should achieve. I wish we spoke more about end state than about culture change. 

Paul Gottsegen

Well, servitization is my new favorite word.