Suppliers are now providing whatever it takes to deliver a customer's desired outcome, not just an asset and services to make it go, as the industry adopts servitised business models, according to Lee Thompson, DLL Group’s head of pay-per-use solutions in Europe and Australasia.
When searching for ‘What is servitisation?', Google gives me over 112.000 results. So it might help if I start with explaining how I look at servitization.
Simply put, Servitisation is the combining of assets and related services into one single offering from suppliers to their customers. As a combined offering, it enables suppliers to sell more than just the sum of the parts; instead the offering supplied can be expressed in outcome terms. In other words, the supplier is now supplying whatever it takes to derive the customer’s desired outcome, not just an asset and services to make it go.
If a supplier is able to accurately identify what outcome the customer wants, then it can design its servitised offering accordingly.
All successful businesses have this in common – they have worked out what the customer wants and designed their offering towards that. They understand this doesn’t stand still; as needs change so too must the offering.
When it comes to servitising their offerings, I see there being 3 groups of suppliers: the confident, the curious, the confused. While some industries have embraced it (notably printing, transportation and recently healthcare, particularly the NHS), some are aware the market is starting to turn this way and are interested to know more but have simply continued to do more of the old. And some are aware, but could benefit from more guidance on what this means for their business. Why change, what will my servitised product look like, and how I do get from here to there. There certainly seems to be a lot of “I get it, but where do I even start?”
Two major trends in servitisation
We’ve already been seeing servitisation for a long time. If you look at copiers, I can’t recall anyone ever wanting to sell copiers into the workplace without also signing the customer up for the supply of ink. In fact, DLL was at the forefront of developing the cost-per-copy funding solution back in the ‘80s which brought the product and services into one single payment per click. It has also been commonplace in the supply of vehicles, from trucks down to cars. These always typically go hand in hand with some form of service and insurance pack. So servitisation as a concept is not new.
What is new however seems to be two things:
- The types of services going into these contracts are growing. They are helped largely by rapid technology which allows suppliers to gather more data about how and when the assets are being used.
- For example, before it was just ink, now it is everything to device connectivity, user key cards, and in-life fleet optimisation services. Like the printer, many assets are almost becoming the loss leader for a supplier to be able to sign up customers to services. And as we’ve seen historically in some markets, many suppliers have been able to earn a higher margin on services than on equipment mark-up. This trend to selling more services is hardly surprising.
- Customers are starting to demand outcome-based contracts. Put simply: “supply me what I need to deliver my business outcome. Don’t just give me the asset."
- A good example at the consumer level is Amazon Prime – for one monthly payment we get a lot of services: free package delivery, TV and music streaming. We can even get free audio-books and an echo-dot thrown in if we sign-up at the right time. So we’re not buying DVDs and CDs anymore, we’re getting our outcome from services. Now I know this is difficult to relate to hard assets like diggers – you can’t just stream a digger. But how about if the supply you offered the customer was defined as an outcome. Instead of “we will supply you with a digger at £x per month” what if it was “we will supply you with what you need to complete your jobs this year”? Suddenly this transforms the proposition from an asset with no direct connection to the job, to a service contract where you will provide assets which are fuelled, serviced, insured (and possibly manned), and right-sized for the outcome the customer wants to achieve. The supply has now been servitised and linked to the customer’s desired outcome. If it turns out that the customer doesn’t actually get as many jobs that year to cover the cost of the asset deployed, then DLL is open to taking on that risk of under-usage.
Servitisation is gaining traction in B-to-B markets
So, what we’re seeing at the consumer level, we’re starting to see at the business level. And there can be a multitude of reasons for this – from simply wanting the convenience of buying a one-stop-shop solution, to the business customer wanting to de-risk their operation by paying for outcomes only. It may be as simple as the fact that every business leader is a consumer at home, and the value logic has therefore already been experienced and accepted. Good concepts at the consumer level almost always bubble up into the business world. And this is across all industries, because at the end of the day every type of asset can be coupled with some sort of service to deliver true value.
The interesting thing will be to see this evolve as more and more suppliers start to bring servitised solutions to market. It is likely a lot of these solutions will be incredibly clever and things that we don’t even think we need today. The analogy I use is that everyone was very happy with the Nokia3210 until the first iPhone came along, and now we can’t do without the iPhone. I suspect the same will be said of servitised solutions as they come to market.
Fundamental shift across businesses
Another feature of servitised offerings is that they allow suppliers a medium by which to provide their customers with experiences. No longer a supply of asset on day one, but a bespoke service solution that is supplied and adjusted to fit to the customer’s needs over time. Done well, it can move a supplier into the enviable position of being a true business partner to their customers instead of simply one of selling units. It is a move towards focusing more on enabling the success of your customers rather than simply providing them with a product and leaving them to figure out how to get optimal value from it.
It is not to say servitisation is for everyone, but logic would dictate the more you help a customer to achieve their outcomes the more valuable you will be to their operation. At DLL we believe the market is well along the curve of an evolutionary shift in asset procurement, and we are busy creating funding solutions that align to this.
As the market moves to ask for more services and outcome-based contracts, traditional funding models need to change. And that’s what where we come in.
This is not new to DLL. We started this journey in 1971 by offering different leasing and loan options leases to customers wanting to procure assets from suppliers. Then in the 80s, we solved for cost-per-copy funding solutions for customers desiring greater flexibility around how they pay for productivity.
Now, we are providing funding solutions for customers wanting greater flexibility and convenience by taking more and more services bundled in with the asset --- And with potential to pay only when they use. This is our new capability and represents a massive evolutionary shift in how we look at asset finance.
It is extremely important to us to continue developing this capability and pioneer new ground, alongside suppliers that are taking steps on the servitisation journey.
* Lee Thompson is the head of pay-per-use solutions, Europe and Australasia at DLL. He was previously chief legal counsel responsible for all legal matters involving the UK business. While his career has predominantly been spent in the asset finance legal sector, he developed a “keen interest” in the development of the UK asset finance industry, particularly at how the traditional leasing products are rapidly evolving to meet customer demand for subscription-based products.
Thompson has held a variety of senior positions starting with senior legal counsel for CIT where he acted as a legal advisor to the vendor finance business, specialising in small- to mid-ticket leasing. He quickly progressed to the position of head of legal where he advised on all legal matters within the South East Asia region, including advising on finance transactions and vendor programs, asset recovery and debt collection.
In 2009, he left this post and began working for ANZ Bank as an associate general counsel in New Zealand where he was responsible for all legal matters for the commercial, rural and asset finance division of the bank. During his five years with ANZ, he also took the role of primary advisor for the issuing of the division’s debt securities and private equity division.