Contracting Excellence Journal

Articles, news and insights from IACCM staffers and over 60,000 Members.

Subscribe and never miss out. There's always something going on here!

I promise that it’s quite simple really!  At its core, servitization refers to industries using their “products” to sell “outcomes as a service” rather than a one-off sale[1].

I find it’s always helpful to be able to put a definition like this into a real context and French electric utility company Engie together with Dutch electronics firm Philips offers a fantastic example of a servitization in practice. Among its many ambitions, Amsterdam-Schiphol seeks to be one of the most sustainable airports in the world.  With this in mind, back in 2015, the Airport entered into an agreement for the provision of LED lighting-as-a-service.

As many of us will be aware, while LED lamps are incredibly efficient, they are also expensive to buy. Under this business model, Schiphol benefits from a significant reduction in electricity consumption, without the upfront cost of having to buy the lamps. Philips retains ownership of the equipment and instead sells “light” as the product rather than the individual units. Through internet of things (IOT)” connectivity, Engie are able to monitor each lamp and replace faulty ones often before the fault actually occurs, providing a complete servitization package.

Neither the term nor the concept of servitization are particularly new.  Rolls Royce was a pioneer in this space more than 50 years ago when, rather than requiring their customers to buy an engine, they instead offered the power it provided, known as “Power by the Hour”. This relieved customers of the capital costs of buying engines and afforded greater forecasting accuracy.  The term itself was introduced in a paper by Sandra Vandermerwa and Juan Rada[2] back in 1988 in which they argued that manufacturers needed a way to set themselves apart from their competitors and retain their customer base.  

Of course, we have seen the advent of servitization across many different industries. Netflix is one the most well-known examples of delivering media as a service, cloud computing is by far the most widespread example and even the fashion industry is jumping on the servitization bandwagon, offering clothing as a service[3]. What is important, and as the Schiphol example above highlights, is how manufacturing businesses can and indeed need to benefit from servitization. 

Technology will play a pivotal role in the overall success of the servitization business model, after all, a service is only useful if it is up and running.  As we can see in the Philips example, IOT and embedded sensors supporting the continuous transmission of data from the Airport to Phillips is a fundamental component of the service.  

So now we understand a little more about what this is all about - why is it so relevant and why have we chosen this as a key element of our theme for 2020.  Servitization requires a keen focus on the nature of the commercial relationship that we enter into.  The provision of these advanced services requires a far more relationship-based[4] approach to contracting than is necessary when entering into a more transactional agreement around a one-off product and since title does not pass, the supplier must remain engaged and responsible for performance.  In my next blog we will look in more detail at the broader commercial impact of servitization[5]

[1] You might have seen reference to other similar terms including servification and servicification and from what we can see, these are used somewhat interchangeably with the term servitization being the most frequently used.  For what it’s worth, I can also confirm that the use of the “z” as opposed to an “s” is also deliberate.  This has been and continues to be the preferred spelling of the international academic community. 

[2] https://www.sciencedirect.com/science/article/abs/pii/0263237388900333

[3] https://www.voguebusiness.com/technology/clothing-as-service-caas-rental-rent-the-runway

[4] Unpacking Relational Contracts 

[5] A Guide to Fair Contracts for 'As a Service'

Sally Guyer CEO of IACCM


View All Articles

About Globality

Globality’s stated mission is to “give all companies an opportunity to compete and win based on the merits of proven performance, expertise, and passion.”

Topics from this blog:
Servitization
> Back to all posts

IACCM Membership Types & Pricing

Take a look at the various membership types, or take a better look by becoming a FREE Trial Member

Membership Types & Pricing