A model to assess status and progress towards digital servitization

In today’s rapidly changing markets, manufacturing firms are increasingly challenged by the convergence of digital technologies and servitization, which is defined as Digital Servitization. In fact, the adoption of digital technologies such as the Internet of Things (IoT), Data and Analytics, or Artificial Intelligence can alter the features of the delivered services significantly and enable novel business models, thus, reshaping industry competition. Indeed, Digital technologies shape servitization strategies, structures and activities aiming at increasing the service delivery efficiency and value of service offerings. For instance, KONE, one of the largest global elevator companies, developed sophisticated condition monitoring and predictive maintenance services together with IBM. Both these services are based on IoT technology and have resulted in lower downtime and faster equipment restoration. The convergence of digital technologies and servitization is called digital servitization and refers to the development of new services and/or the improvement of existing ones through the use of digital technologies by enabling new digital business models, finding ways of co-creating value, generating knowledge from data, improving a firm’s operational performance and gaining competitive advantage over rivals. It has received significant attention over the last few years from the research community and practitioners. Despite the phenomenon’s growing relevance, the issue of defining how digital servitization changes a company’s strategy, processes, and culture remains unexplored.

Enterprises struggle to grasp this phenomenon’s vision, constantly facing pressures to obtain and retain competitive advantage, inventing and reinventing new products and services, reducing costs and time to market, and enhancing quality at the same time. They need to define improvement actions to be taken to navigate through the transformation process and prioritize between different activities. Therefore, more attention has to be focused on helping organizations to decide when and why they need to take actions to progress and guiding them on which actions should be considered.  The introduction of such a “maturity model” in digital servitization, could, therefore, allow managers to position and compare their current state to the best-practices in related business fields and map their new strategy accordingly, which will increase the firm’s overall performance. Hence, the aim of our research project is to develop a maturity model (MM) that can ease the decision making, and assess the digital servitization maturity in manufacturing companies based on highly relevant criteria.

The identified requirements both from literature and expert interviews were summarized in four dimensions. For each dimension, corresponding maturity criteria were defined, which describe the fields of action. Activities in these fields show the degree of digital servitization maturity. We employed “Strategy”, “Customer Experience”, “Business Processes” and “Organization and Culture” as dimensions that serve not only as a conceptual basis but serve for collecting the exploratory identified requirements and as a theoretical lens for the MM.

The Strategy of digital servitization is embedded within the overall business strategy and focuses on how the business transforms or operates to increase its competitive advantage through digital initiatives in service. “Strategic Orientation” was identified as an important prerequisite for digital servitization and it refers to the exploitation of the overall growth strategy aiming at developing digital service offerings and innovating the company’s portfolio. “Business Model”, another critical requirement, refers to the different technology-enabled business models that facilitate firms to achieve a competitive advantage by providing customer knowledge‐based digital service offerings during the entire product life cycle. In addition, “Digital Service Offering” applies to the enrichment of the existing but also the creation of totally new service offerings enriched by digital technologies that bring digital and physical systems together creating customer value and revenue streams. The last requirement of this dimension is the “Digital Service Ecosystem”. It refers to the relationship between the company and business partners (R&D organizations, technology incubators, startups), enabled by platforms, which aims at gaining access to resources such as technology intellectual property or people to increase the organization’s ability to improve, innovate and grow, balancing security and privacy needs with the ability to flex capacity according to business demand.

Customer Experience focuses on the necessity of considering customers’ needs and interests as the basis for developing digital service offerings. The first requirement we identified is “Customer Centricity” which deals with a set of procedures and practices for assessing closer customers’ preferences and continuously evolving needs on digital service offerings, to enhance the competitive position and strengthen customer relationships. Experts also stressed “Customer Trust”, which refers to how customer’s trust is built and how perceived risks (functional, psychological/safety, privacy) are evaluated by them.

The dimension of Business Processes contains the way of executing and evolving a company’s operations by using digital technologies aiming at driving strategic management and enhancing service business efficiency and effectiveness. The first requirement is “Production” and indicates the way processes are executed, monitored and managed. It consists of internal processes (the way inputs are transformed to outputs, products and services are integrated through digital technologies to create value for customers and end-users), supply chain orchestration (the way the firm employs digital technologies to manage the value network of all actors and individuals that interact to deploy resources and applied competences in order to create value) and digital innovation (practices based on digital technologies that support research, design, and development of new product-service offerings). The “Marketing” requirement includes pricing, the process whereby a business sets the price at which it will sell its digital service offerings and value co-creation, which occurs through interactions among providers and customers by integrating resources and applying competences. “Human Resources” requirement depicts to services provided by an HR department to business operations. HR operations include administrative services, recruitment, job analysis, and employee relationship management.

The Organization and Culture dimension defines and develops an organizational culture with governance and talent processes to support progress along the digital servitization maturity curve, and the flexibly to achieve growth and innovation objectives. “Digital Service Business Mindset and Culture” describes the diffusion within a company of a mental model that is oriented towards digital service culture: the company needs to change its mental model to view digital service offering as part of its business logic and perspective on value creation. Furthermore, “Governance and Leadership” refers to the decision making processes which define the expectations, systems, and management of projects related to digital. Another significant requirement is “Organization Design and Talent Management”, the transformation of internal organizational structures by establishing dedicated team/roles/persons for the development of digital service offerings in light of new competitive pressures. The final requirement is “Competences”, which identifies higher and diversified competences that employees need to develop by acquiring new knowledge and ways of working to execute increasingly interactive tasks, make data-driven decisions, understand customers’ problems and interpret their real needs.

To define the digital servitization MM phases we used as main reference the MM processes of Paulk, Curtis and others, in their paper Capability Maturity Model for Software from 1993. For simplicity in this study, we use three maturity stages (Levels 1, 2 and 3).

Beginner (Level 1) is a maturity level where a company has some pilot strategy initiatives and offers base services. The usage level of digital technologies in business processes (production, marketing, HR) is low. Flexibility, integration, and collaboration with partners are at a low level as well. The customer interaction is distant, while there is minimal tendency towards digital servitization. The organization structure and people are not prepared enough for this transformation. In detail:

  • Limited vision of digital servitization, no documented implementation targets. No strategy initiated and developed. Low investment.
  • Add-on business models use digital technologies (ICT, IoT) to enable additional functions or add personalized services to the existing physical products or service to facilitate service provision.
  • Low usage levels of digital technologies in provision of obligatory product-related services (base services), such as installation or maintenance and repair.
  • Company has partnerships with a few stakeholders; Low-level collaboration. No flexibility, no additional integration; limited understanding today, no shared view of future.
  • Customer preferences and needs are not systematically collected. Interaction between customer and company is limited or distant. Limited collection of customer feedback. Impersonal customer communication.
  • Limited documentation; Customer does not know when/how the service provider accesses the equipment; uncertain about which activities are performed on the machine. Service technicians can access private/confidential information beyond the service agreement; no control.
  • Operation process traceability is provided partially; Low-level end-to-end visibility and production customization. No clear integration and standardization. Integrated supply chain processes between the company, suppliers, and customers in terms of basic data sharing and communication; few software systems in use and production systems are partially automated. No activities supporting digital service innovation, apart from observations. Data usage in service innovation is at a low level.
  • Few analytics studies are conducted and data obtained is not used in product pricing and dynamic pricing. The customer has little control over the value creation process and provider offers the digital services that it chooses.
  • Data is used in a few areas, but company does not share real-time data with field workers. Traditional recruitment and training, e-learning is not an option.
  • Low attitude towards digital servitization.  Digital competences are not critical, the development of new digital service offerings for customers is not actively promoted. Low level of knowledge sharing and no/or limited areas of collaboration across company.
  • Low quality/transparency/availability and accuracy of data used for decision- making processes.
  • Organization structure is not suitable for transformation. No formal or informal transformation roles are created. Limited interaction between departments.
  • Only technology focused areas have employees with digital skills and they are not allocated to specific digital servitization projects.

Experienced (Level 2) is a maturity level where a company is implementing digital servitization and offers intermediate services. Digital technologies are used at a moderate level in the different business processes. The ecosystem is getting digitized while collaboration is becoming closer. The customer is integrated into the design phase already and a positive general attitude is encouraged to transformation is encouraged. The organization structure is suitable for initial projects and people in units or departments that have on-going digital servitization projects have the necessary competences. Specifically:

  • Incremental vision of digital servitization, not fully defined implementation target. Strategy implemented and occasionally reviewed. Investment and innovation management established in multiple areas.
  • Usage-based business models use digital technologies (IoT, Cloud Computing, Big Data) to measure the amount of product usage and allow customers to pay for or subscribe to a plan, based on their actual usage and needs (pay-per-use). Moderate usage level of digital technologies to provide intermediate services (e.g. remote monitoring)
  • Company has partnerships with some stakeholders; Medium level of collaboration. A moderate level of flexibility, integration, and understanding.
  • No systematized approach to on-going preferences/needs collection. The customer is integrated in the early design process in order to align the product to customers’ needs. Formal feedback is collected after technical assistance interventions.
  • Some documentation; Customer does not know when/how the service provider accesses the equipment or which activities are performed on the machines. Service technicians can access some private/confidential information beyond the service agreement; Little control.
  • Operation process traceability is provided at production line level; Medium level end-to-end visibility and production customization; Integration and standardization are at a medium level. Integrated supply chain processes between company  and key strategic suppliers/customers in terms of data transfer; Some software systems in use and production systems are automated at production line level. Systematic approach for digital service innovation; Company is aware of the process but some activities are still incomplete or inconsistent. Data usage in service innovation is at medium level.
  • Analytics studies are conducted and data obtained is used in product pricing and dynamic pricing. The customer has some control over the value-creating process and the provider offers the digital services that customer also needs.
  • Data is used in some areas; Company shares real-time data with field workers. Traditional/Digital recruitment, e-learning is an option.
  • Promotes positive attitude towards digital servitization at a medium level. Evaluates errors, identifies the importance of digital competences, and the development of new digital service offerings is promoted. Encouragement of knowledge sharing and structured and consistently performed cross-functional collaboration.
  •  Medium quality/transparency/availability and accuracy of data used for decision- making processes.
  • Organization structure is suitable for initial projects. Some new roles are being created. Departments are open to cross-company collaboration.
  • In most areas of the business digital skills have been well developed and are allocated to specific digital servitization projects in different units.

Leader (Level 3) is a maturity level where a company has implemented digital servitization, has a comprehensive vision and offers advanced services. The usage level of digital technologies is high both in the business processes and business models. There is a fully digitized, integrated partner ecosystem built on a flexible and integrity architecture. There is an intimate relationship and personalized communication with the customer while the attitude is comprehensive and promotes digital servitization. The organization well structured and digital competences are prevalent in the whole company. In particular:

  • Transformational vision, clearly defined implementation target. Strategy implemented and regularly reviewed. Enterprise-wide investment and innovation management established.
  • Solution-oriented business models use Digital technologies (IoT, artificial intelligence) to enable the provision of solutions to customers. With the aid of IoT technology, providers are able to offer integrated solutions to customers’ needs (subscription availability).
  • High usage level of Digital technologies provides value for both customers and the companies’ internal processes creating novel services (advanced services).
  • Fully digitized, integrated partner ecosystem; Open system built on a flexible and integrity architecture; clear shared view, today and in the future.
  • Formal procedures and rules drive customer preferences and needs, used for future strategic decision-making. Customer and interaction data collected through different channels. Feedback is discussed with the customers and is explicitly considered in the continuous improvement process by creating common platforms. Intimate relationships.
  • Customer knows when/how the service provider accesses the equipment and which activities are performed on the machine. Service technicians cannot access private/confidential information beyond the service agreement; Control.
  • Operation process traceability is provided at factory level; High-level end-to-end visibility and production customization; High level of process standardization. Supply chain systems are fully integrated between company, suppliers, and customers and provide real-time planning;  Quality management and continuous improvement activities are formalized Data usage in service innovation is at a high level.
  • Analytics studies are conducted and data obtained is used in product pricing and dynamic pricing. The customers are tightly integrated and engaged with the provider’s processes and resources. They are jointly able to discover opportunities for value creation.
  • Data is used in many areas; company shares real-time data with field workers. Special training (mixed reality, internal academy) for re-qualification of the employees. Digital recruiting.
  • Promotes digital servitization vision. Evaluates errors to improve processes, digital competences are critical, customers suggest systematically improvements for digital service offerings. High level of knowledge sharing and sophisticated forms of cross-company collaboration in value creation networks. Great experience on mobile working and little regulation is needed.
  • High quality/transparency/availability and accuracy of data for decision- making processes.
  • Well-structured for transformation. Formal roles responsible for strategic planning, which are well connected within business units. Departments are open to cross-company collaboration to drive improvements.
  • All across the business, cutting edge digital and analytical skills are prevalent and allocated to specific digital servitization projects.

The developed maturity model for digital servitization can be used by managers to inspire, establish trust, build consensus and communicate. First, managers can use the model by asking what they could learn from others’ experiences in different organizational contexts. The objective is to avoid mistakes already made by others and benefit from accumulated experiences. In this way, the maturity model supports managers to identify their requirements, areas of improvement and gaps to close  and provides insight on how to steadily expand digital servitization. Second, the development of digital servitization often requires significant investments, for which the approval of top management is necessary. To receive approval, it is essential to convince decision-makers that these investments are urgent and will pay off. Therefore, the model can help create the necessary credibility to gain top management support. Third, the success of fundamental business transformation depends on the existence of a strong consensus and a clearly defined and well-executed digital servitization strategy. The basis for consensus and a common assessment of the as-is situation is a shared language and consolidation of diverse perspectives. The maturity model encompasses a number of dimensions and requirements, along with their definitions. Hence, it provides a shared language that facilitates the structured exchange of perspectives.  Finally, tangible evidence of the current state of digital servitization is needed both at the corporate level but also by those who are responsible for developing the concept and model. By capturing the maturity stages at different times, the model provides the means for continuously assessing and communicating progress. Consequently, the developed maturity model is a tool which enables and facilitates internal awareness for both strengths and weaknesses and highlights improvement potential.

Theoni Paschou has studied or worked in five different EU countries and Switzerland. She is currently completing her Ph.D. studies in Digital Servitization at the University of Brescia, Italy, and the University of St. Gallen, Switzerland. In her research she focused on how digital technologies like the Internet of Things, Big Data, Artificial Intelligence, and Virtual and Augmented Reality are changing the service business (strategy, people, processes). More specifically, she identified and developed a framework of the most required competences for the workforce of a company undergoing digital transformation.