Servitization is a transformation journey. Along this journey, businesses work to develop capabilities for providing services that supplement their traditional product portfolios. In last week’s column I went into great detail to explain these points. So this column, I will give some real-world examples of servitization in action and will offer up what steps manufacturers and other businesses can do to begin their own transformation journey.

Are services really that important to growth, both on the individual business level and for the industry as a whole? Simply, the answer is yes.

IDC’s research report says the IoT (Internet of things) global spending will reach more than $772 billion in 2018—up about 14.5% over last year, which reinforces my point. IoT spending is expected to surpass the $1 trillion mark in 2020, which is just a couple of short years away. IoT hardware will be the largest technology category in 2018. $239 billion will go toward things like modules and sensors, as well as infrastructure and security.

But the second largest technology category in 2018, according to IDC, will be services. By the end of this particular forecast period—2021—services spending is expected to nearly equal hardware spending.

That’s because IoT services spending will grow at a faster rate than overall spending on the IoT.

Services are so important because they’re like the icing on a cake. They bring all the technology elements together to create a comprehensive solution that can help maximize the IoT value proposition.

Looking at the vertical market, in 2018, the industries that stand out in terms of the most money spent on IoT will include manufacturing ($189 billion), transportation ($85 billion), and utilities ($73 billion). In all three of these industries—manufacturing, transportation, and utilities—asset management will be an important driver of IoT spending.

Clearly, manufacturing is going to be a huge trend setter for the space, considering 2018 spending is expected to be more than $100 billion more than the second-largest spending category.

The report makes it clear manufacturers are going to be responsible for a big part of the shift in spending toward services, and this is just exciting to see. I am thrilled to see the manufacturing space setting trends and leading the way in the IoT.

But, you may be asking, what does servitization actually look like? How are businesses implementing this trend?

Let’s take a look at servitization in action.

One excellent example of servitization is Rolls-Royce and its Nor Lines, which have a “Power by the Hour” service agreement for two gas-powered vessels. It works like this: The customer, Nor Lines, pays a fixed charge per hour of operation per ship, and Rolls-Royce remotely monitors the vessels’ onboard equipment. So, essentially, Nor Lines is passing the baton of responsibility for service planning and performance back to Rolls-Royce.

The power-by-the-hour service agreement benefits Nor Lines by insuring them against downtime due to equipment failure. It is also in Rolls-Royce’s best interest that its equipment functions optimally, because this protects the relationship with its customer. So, as you can see, it’s a win-win situation.

Here is one more example of servitization in different industry. Winterhalter is a German manufacturer of commercial dishwashers, and its “Pay Per Wash” business model is exactly the type of service-based model that I think we’re going to start seeing a lot more of.

Winterhalter is offering its customers an alternative to buying or even renting a commercial dishwasher. The idea behind “Pay Per Wash” is that customers are able to pay for exactly what they use. They only pay when they’re actually using the equipment.

This is instead of investing a bunch of money upfront to stock their kitchens with equipment like dishwashers, which can be difficult for entrepreneurs. It also doesn’t make a lot of sense for businesses that operate seasonally, like, say, a beach bar or restaurant.

This business model offers customers the opportunity to achieve the outcomes they want—clean dishes—without having to own the equipment. Winterhalter offers flexible service contracts with no obligation, they cover maintenance and service on the equipment, and they bill per washing cycle.

It’s just a totally different way of thinking about things. And that’s servitization. So what are some steps businesses can take to add services to their repertoire? They can begin by initiating a basic service program, and then they can look for ways to upsell their existing offerings.

They can also look at offering monitoring services that enable proactive maintenance on their products. Ultimately, the goal is being able to sell outcomes, not just products.

Selling outcomes instead of products means the customer knows they will get the outcome they want. This is incredibly enticing for end users, because they just want their products, devices, and equipment to work when they need them to work.

But, as I mentioned last week, servitization is going to require an internal mindset shift at most companies. We need to start defining products as platforms that can deliver value-added services.

If you as a company can start thinking in these terms, you’re on the right track. I think this is such an important moment in the IoT.

More and more companies are realizing the value of services and starting to think outside the box in terms of servitization. Servitization requires companies to think differently and to step outside the box to generate the revenue and the customer experience they are seeking.

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