Servitizing A Services Business

In the classic scenario, servitization is a process of transforming a product business into a products+services one. But the process of servitization is centered on people and organization (both internally and externally) and a similar, but different, approach can be used to take an existing services business forward too. Servitization is also a continuum – both in terms of how companies implement it (its an iterative process) and also in how the concept and diciplne of servitization itself has evolved and will continue to evolve over time. The methodologies, techniques and processes used to servitize a business are refined based on experience and technological developments.

One of the most high profile servitization initiatives undertaken was that of IBM in the 1990s. Theirs was (and still is) a story familiar to many other product companies – shrinking margins on a product business facing increasing commoditisation and competition. They embarked on a wide ranging programme of servitization that completely transformed the company and its fortunes. Today, services account for 60% of IBMs revenues (and even more of its profit margin) and its Global Services organisation is a global leader in the field of IT services. So it is particularly interesting to note how in recent years it has had to re-structure itself again – this time in that same services business.

As the recent FT article recounts, by 2004 IBM was facing increasing commercial pressures due to commoditisation and competition of its services portfolio. This was largely driven by the growth of off-shore outsourcing from the BRIC countries (even though IBM had massively increased its footprint in these regions too). The solution for IBM was to review and rethink its services business – servitize its services business. Its a process we undertake with our customers too, many of whom are pure service companies. It involves a complete audit of the existing service portfolio, revenues, customers and markets. In IBMs case, this led to strategic exiting of lower value services where commoditisation and globalisation had the greatest impact and an increasing focus on services where their specific advantages in both knowledge and location gave them an edge (and higher margins). They also implemented a programme of service standardisation to reduce their costs of service delivery and greatly increased the use of technology tools throughout the entire process. Many of the servitization lessons IBM applied to its services business were learned earlier through the servitization of its hardware business.

It is often much easier to understand and implement servitization in a product company. Services companies can be somewhat blind to their own needs and opportunities in this area. In an increasingly competitive, globalised, service-centric world, it’s important that they don’t lose sight of them. IBM posted improved earnings results in the 4th quarter and have a more positive outlook for 2009 than many of their rivals.

Steve

Blog Blastoff

We have been talking about launching our blog here at Servitizer for some time now but for various reasons it has been postponed, until now. One of the reasons we have hesitated is that from my own personal experience I know that while it quite easy to create a blog its much easier to then neglect or even abandon it (like a gym membership). So to ensure this doesn’t happen, we have implemented medieval-like punative measures for team members who do not post and contribute to it. Lets see how it goes.

Anyway, on a more useful note here is what we will actually talk about – servitization and related topics such as solution innovation, business transformation and customer behavior modeling. The basic concepts are well documented elsewhere (including on our site here) but in summary the term servitization describes the process of adding value to a product and a product organisation through the development and integration of services. We also broaden the classic definition somewhat by applying the term to services and service organisations too. This may sound counter intuitive but it reflects the nature of todays service industry which in many cases has created ‘products’ out of services and so can also benefit greatly from a structured programme of servitization.

Until the next time…