Is Service-Led Growth relevant to manufacturers?
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Service-led growth offers a compelling alternative to product-led growth. It requires less investment capital and builds stronger and more durable relationships with customers. These relationships drive the insights needed for meaningful innovation. But is service led growth relevant to manufacturing?
Before we try to answer this question, let’s quickly review the basic service-led growth flywheel.
In service-led growth, a service is used to solve a key problem for a customer and then that solution is delivered through a software platform. The software platform gathers data. The data is used to generate insights. Some of these insights will lead to further service engagements. These engagements lead to expanded subscriptions to the software.
Admittedly, this model was initially developed for professional services companies that need to move to a more scalable business model and for enterprise software companies transitioning to cloud-hosted platforms with a subscription revenue model. Two other paths to service-led growth were discovered later: SaaS companies who had hit ceilings as their offers solved problems that needed a deeper customer relationship; and new technologies that were not ready to be codified into a simple product. See Four paths to service-led growth.
Does this mean service-led growth is irrelevant to manufacturers? No.
Many of the top manufacturers have been executing their own version of service-led growth for decades. This approach does not rely on software. Rather it uses design and configuration services as an entry point to selling equipment. The old IBM was the master of this. So much so that the contract to develop the software was a path to selling the hardware. The same is true of most manufacturers of heavy equipment, from turbines and generating equipment to factory automation and warehouse systems. Design and configuration were necessary services that became part of the sales process.
There is a critical piece missing here. The feedback loop from having the equipment installed and working through data to insights. Without this feedback loop, there is no flywheel effect and future revenue is much less predictable.
The Internet of Things has changed this. Increasingly, equipment of all types is being instrumented and the data is being sent to a central location for processing. These sensors (and controllers) have been added to everything from bungs on wine casks, to industrial valves and filters (Parker Hannifin), to intelligent vibration sensors (Movus FitMachine). Instrumenting equipment and gathering data does more than create new value drivers and enable new pricing models. It can be used to drive new growth models with the same characteristics as service-led growth.
One of the classic stories told in pricing circles is Power by the Hour, a term coined by Rolls Royce to describe a business model in which airlines pay only for the time an engine is being used to power a plane. Traditionally, the airline bought the engine and contracted for maintenance. In the Power by the Hour model, the airline leases the engine and only pays for the time it is powering a plane. The manufacturer is responsible for the maintenance costs and for making sure engines are available and working as necessary.
This had two outcomes. The engines were instrumented (became part of the Internet of Things - pre Internet) and engine companies became financial companies and not just manufacturers.
For manufacturers to really execute the service-led growth model, they do not need software. They can deliver the value through the hardware (which these days is often stuffed with embedded software), often through hardware as a service type of models, but they still need to harvest data that they can use to generate insights.
These insights then need to have the potential to generate additional services (design-build-operate in many cases) that lead to upsell or cross-sell of additional hardware …
The goal of the service-led growth model is to build a flywheel where each part is driving a positive feedback loop to the next. One way to test if one actually has a service-led growth model is to see if the numbers in one of the three activities (services, subscriptions, insights from data) predict future activity in the next activity in the flywheel. The key measures are prediction and time lag. Once you understand these relationships you can optimize them.
So, the service-led growth model is a possible growth flywheel for manufacturing companies. To make it work, one needs to have a solutions mindset, where one is creating a solution for some customer challenge, and not just shipping widgets (there is nothing wrong with just shipping widgets, but it quickly becomes a commodity business, and the winner in commodities businesses is generally a company that gets the quality/cost function right). That is not all, one also has to be able to collect data and generate the insights for the customer that drive new business. It is not strictly necessary to provide the hardware on a subscription model. That is not always the right choice. But one does need to find a model where the hardware provides a long tail of revenue.
Over the coming years, we expect more and more manufacturers to adopt some version of service-led growth as hardware, software and data are combined into compelling and differentiated solutions.
Read other posts in the Service-Led Growth series
Product-Led or Service-Led Growth: Which is a Better Fit for Your Business?
Is Service-Led Growth relevant to manufacturers? (this post)
