February 21, 2024 •Avvale
Among the various definitions of servitization, one particularly fitting description portrays it as a profound business transformation process. Precisely, through servitization, an organization shifts from a product-centric model and business logic to an approach focused on services. The foundational concept involves offering a combination of products and services, known as Product Service Systems (PSS), with a recurring payment formula typically based on usage (pay-per-use).
Winning examples of servitization span across all sectors. For instance, Rolls-Royce Aerospace provides its engines to airlines with a recurring cost model based on usage. Servitization also applies to managed print services used by many offices, car-sharing, the market for medical devices as-a-service, light as-a-service, cooling as-a-service, and various other adaptations. What is certain is that servitization modifies the value proposition of many companies, as well as the value generation process.
Servitization and the Concept of Profitable Sustainability
It is said that servitization unlocks profitable sustainability. To understand its essence, one can start with the concept that a business is sustainable if it simultaneously pursues a triple bottom line:
- economic growth;
- environmental sustainability;
- social well-being.
The great interest in servitization stems from its "inherent" ability to balance all three foundational interests of modern economic systems.
The pillars of Product as a Service: recursiveness and pay-for-use
Profit generation is essential for a profit-oriented organization, and servitization has already proven to uphold this promise in various contexts. Firstly, from the perspective of differentiation from competitors, but also because the as-a-service model significantly expands the pool of potential buyers in the consumer and B2B sectors. Lastly, servitization generates a continuous revenue stream throughout the product's lifecycle, stabilizing income and strengthening the company's financial position.
Positive Impact on the Environment and Society
As anticipated, servitization enables a virtuous circle in which economic sustainability is accompanied by a positive impact on the environment – an increasingly strategic factor for the competitiveness of any enterprise. Servitization extends the product lifecycle by providing continuous maintenance, repair, and refurbishment services. The pay-per-use model has the beneficial effect of encouraging correct user utilization, resulting in a triple advantage of reducing:
- costs;
- waste;
- environmental impact.
Moreover, the model incentivizes the producer (also the service provider) to create products with a very long lifecycle to remain in the market, generating profit for as long as possible.
Supporting data is also available when this evolves into a shared model like car-sharing. Each car introduced into the system can replace between 9 and 15 private vehicles, significantly reducing the overall environmental impact. Equally relevant is the social aspect, as servitization reduces or eliminates capital investments (CapEx), transforming them into recurring expenses, making products and services accessible to an increasing number of people and businesses, promoting social and economic evolution.
Servitization as a Pillar of the Circular Economy
Quoting the European Parliament, the circular economy is a "production and consumption model that involves sharing, lending, reusing, repairing, refurbishing, and recycling existing materials and products for as long as possible." Given this definition, the connection between servitization and the circular economy is clear: the shift from a model based on the production and sale of products to one centered on service provision can significantly contribute to extending the useful life of goods.
In this context, the service provider must retain ownership of the asset. According to the World Economic Forum, "Maintaining ownership of equipment encourages service providers to rethink the development of modular systems, which is essential for a circular economy." In other words, more solemn but impactful, servitization could help us protect our planet.
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