Servitisation is currently adopted within a range of sectors, but the healthcare industry lags behind, prompting some MA students from the Rotterdam School of Management (Erasmus University Rotterdam) to explore the obstacles, benefits and success factors for healthcare OEMs and hospitals associated with its adoption. A report by DLL.
The growing costs of healthcare in the Netherlands has prompted the industry to investigate innovative ways to cut costs without jeopardising the quality of care.
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The Covid-19 crisis has made this challenge more difficult. Healthcare costs have shot up since the beginning of the pandemic, which has also thrown up the importance of timely access to health services, and for providers, a reliable supply chain.
To find the right balance between efficiency, costs and quality of care, multiple initiatives have been explored, varying from purchasing of healthcare (ie, alternative ways to finance treatments by hospitals and other institutions by healthcare insurance companies) to purchasing for healthcare (ie, alternative ways to purchase goods and services required for carrying out treatments).
Servitisation in healthcare
A significant development within the latter category is servitisation.
Servitisation entails the shift from producing and selling products to providing and selling services, or a combination of products, services, and sometimes consumables.
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By GlobalDataServitisation is already widely adopted within a range of industries, including automotive, materials handling and entertainment. It is popular because it meets changing needs evolving from equipment ownership to instant access to equipment when needed.
The global appetite for services has grown by 30 per cent over the past two years relative to the gross domestic product, meanwhile the nature of services is changing.
In general, the number of people buying conventional products and services is decreasing; instead more people are seeking to buy the outcomes that these products offer.
In other reports, rather than ‘buying a car,’ commuters want ‘mobility.’ And rather than ‘buying insurance,’ homeowners want ‘reassurance.’
Increasingly, people want access to equipment without carrying the responsibilities of ownership.
For the healthcare industry, servitisation relates to purchasing treatments with capital intensive medical equipment as a service (pay-per-use) rather than purchasing the equipment itself.
For manufacturers of equipment, this requires a new business model, and for providers, it enables the benefits of equipment usage without carrying any of the related burdens and responsibilities of ownership.
There are several advantages of servitisation for hospitals, from establishing transparency and predictability of costs, to having access to state-of-the-art equipment and technology.
Additionally, servitisation can facilitate overall optimisation of the cost/value ratio of the treatment process, as there is transparency into the cost per treatment, and equipment-related services like installation, operations and maintenance are often outsourced – maximising the equipment’s efficiency.
For the equipment supplier, the advantages include a higher turnover and margin through the delivery of a broader range of product-related services, and higher value-add to customers by providing a comprehensive set of services instead of only the product.
The appetite for servitisation is growing. However, awareness and adoption vary across sectors. Although healthcare professionals increasingly realise that servitisation helps with outsourcing non-core activities, the transformation from ‘traditional’ equipment purchasing to buying products as a service within the Dutch healthcare system is only picking up slowly.
This paper addresses the barriers to wider adoption within the sector and suggests how hospitals can further embrace servitisation. The research has been done by masters’ students from the Rotterdam School of Management, Erasmus University on behalf of management consultancy Berenschot and leasing company DLL.
Servitisation is a business concept in which original equipment manufacturers (OEMs) offer services either instead of, or complementary to, products sold.
In this concept, manufacturers that are product-centric (merely providing a product) transform into a service-centric one. Within the healthcare sector, this means the equipment owner will no longer be the hospital; instead, the service provider becomes the owner of the product. This requires changes to the business model, the culture and mission of both hospitals and OEMs.
For the business structure of OEMs, four different servitisation stages can be identified:
- Product manufacturer
- Value-added manufacturer
- Full-service provider
- Integrated solutions provider
The servitisation stage depends on the level of services offered which ranges from products with services as an ‘add-on’, to services with tangible goods. The shift from a product manufacturer to a value-added manufacturer covers the shift from an original product offer to proactively offering services.
The difference between a value-added manufacturer and a full-service provider is the former focuses on ensuring the proper functioning and/or customer’s use of the product and the latter focuses on efficiency, and effectiveness of the end-user’s processes related to the product.
The most advanced level is the integrated solutions provider, which includes offering complete solutions through long-term relationships.
Why Servitisation?
Servitisation is the answer to changing market needs. Increasingly, businesses do not necessarily want to own equipment, but rather want access the moment it is needed without the responsibilities of ownership.
Additionally, servitisation can be a solution for manufacturers who wish to distinguish themselves in a saturated market. Offering the best product on the market is often not sufficient anymore. Today, customers are looking for more individualised services like real-time responses and predictive maintenance; meanwhile, resources are scarce so models must become more efficient.
Servitisation has already been successfully implemented in multiple industries where it accomplished reductions in the total cost of ownership and increased efficiency.
For example, in the agricultural sector, ‘farming as a service’ has been introduced as a solution for farmers to acquire expensive and innovative robots to perform simple and repetitive tasks, thus making the process more efficient. Servitisation makes these robots attainable for farmers and provides peace of mind through the operation of the robots and maintenance being provided by the supplier.
Servitisation is a growing trend in the world, but the extent to which it is already implemented depends on different factors. Both the service industry and the percentage of servitised manufacturing companies are influenced by company dimension, geographical location, and commodity sector.
In general, Europe, North America and Oceania have the highest adoption rate of servitisation. The UK, USA and Australia, in particular, score the highest among the countries surveyed.
Healthcare sector
By nature, the healthcare sector is different than other industries and these differences may have an impact on the success level of implementing servitisation.
Both on a global scale and in the Netherlands, healthcare costs are rising and there are limited resources available. With an ageing population and a decreasing amount of qualified healthcare professionals, it is difficult to control growing healthcare costs.
Furthermore, expectations of the services and the requirements for market acceptance and reimbursement are increasing. To increase the efficiency of operations and decrease the cost per treatment, hospitals are starting to involve their suppliers more closely in their operations. One example of this type of supplier involvement is the purchasing of services through which equipment suppliers assist hospital staff in optimising the use of their equipment.
As part of this study conducted by masters’ students of the Rotterdam School of Management (Erasmus University Rotterdam, the Netherlands), both hospital staff and manufacturers have been interviewed.
Several hospitals in the Netherlands have already implemented servitised solutions. One Dutch general regional hospital currently uses limited servitised solutions for acquiring copiers and printers.
In 2016, the hospital started a project in partnership with DLL and reviewed the benefits of servitised solutions within radiology. This assignment has provided insights into the different kinds of devices used in radiology, their usage, total cost of ownership, and programme requirements for establishing a servitisation model.
In some of the top clinical hospitals in the Netherlands, the ICT infrastructure, servers and data have been outsourced and the manufacturers manage the data storage and software.
At another top clinical hospital, medical and imaging equipment is provided as a service.
Although there is greater satisfaction with the service contract because the supplier is much more involved in how healthcare services are being provided by the hospital, further development has stagnated because of challenges from both suppliers and hospitals. These may include:
Challenges
For manufacturers
- Difficulties in determining which types of services to offer in specific global markets
- Limited internal alignment within suppliers, which means that certain business functions may be missed in critical stages
- Risks associated with responsibilities not being clearly defined between suppliers and hospitals
For hospitals
- Commitment to long-term service contracts limiting the possibility to switch suppliers
- Medical personnel not being able to use the equipment that they prefer
- Limited internal alignment within hospitals, which results in doctors’ expectations that are not aligned with the service contract
- Conflicting interests between doctors and suppliers’ sales personnel
The decision to adopt servitised solutions for a hospital is typically based on strategy and forecasts, since servitisation contracts are mostly long-term contracts covering future investments in equipment that have not been fully developed at the time the contract was signed.
Benefits
For equipment manufacturers
- The long-term contract secures revenue streams for the future
- Servitisation establishes strategic product differentiation, setting manufacturers apart from their competitors
- New revenue resources through the services that will be delivered
- A more integrated and long-term relationship with hospitals enabling more customer touchpoints
- Optimised usage of raw materials ensuring more sustainable performance
Barriers
For manufacturers
- Complexity of the model requires a combination of both an accurate view of the present as well as a predictive view of the future about the resources needed for servitisation (eg other equipment, spare parts, personnel)
- Identification of the costs of services can be difficult
- The manufacturer must be able to forecast the needs of hospitals of the future
- The manufacturer must build long-term relationships with its suppliers and share risks associated with servitisation with its supply base
- The manufacturer is responsible for equipment reliability. This requires continuous optimisation, which leads to an increased need for real-time measurement and monitoring processes by implementing measures such as predictive maintenance
- Risk of ‘service paradox’ happens when manufacturers do not possess the required capabilities and solutions to implement servitisation successfully. In instances where the agreed uptime (ie, the time the equipment is functional during operating hours of the client)cannot be met, usually a specific percentage is deducted from the service fee
- The product may need to be adapted per customer
- Change is required in the skills and qualifications of the employees
For hospitals
- Hospitals often fear committing to a long-term contract and a single supplier, as it restricts options for future investments
- Successful implementation of servitisation requires a change of mindset. However, a certain level of reluctance is observed amongst hospitals
- There will be a high dependency on manufacturers, which requires a high level of confidence and trust in them
- There can be difficulties in aligning the interests of all stakeholders involved in the purchasing process
- Medical professionals might need to work with equipment of a brand they are not familiar with
They must understand the need to change and be educated on the benefits servitisation brings.
Based on literature, interviews with hospitals, and interviews with manufacturers, several critical success factors have been identified.
There must be:
- A longstanding relationship between the hospital and the supplier (trust-based relationship and the ability to keep track of performance)
- A shared view (manufacturer, hospital and doctors) of future developments
- Innovation and digitalisation: High technology capabilities
- Enhanced flexibility, enabling the switch among suppliers and benefitting from innovative solutions being offered (applicable to end-users)
- Strategic sourcing expertise: servitisation strategy needs to be developed at a high level. Final decisions about insourcing or outsourcing of activities and how to manage the supply chain should be made by the board instead of procurement
- Customer centricity: understanding the customer’s business and service requirements
- Awareness of new required skills and qualifications of employees
- Product adaptation: the implementation of new services may lead to adaptations of the technical product. The success level of servitisation also depends on the condition of the equipment
- Alignment of processes and interfaces within and between companies, allowing for monitoring performance
- Cultural change: servitisation requires a shift in attitude and behaviour, which must be developed and adopted throughout the organisation
- Identification of cost categories: identification of the costs of service delivery can be difficult, and therefore a deep understanding of the resources is required.
Diagnosis
OEMs operating in a variety of industries have demonstrated that servitisation enables the delivery of additional value to customers. By moving from selling assets to delivering outcomes closely tied to customers’ business objectives, efficiency gains can be realised and total cost of ownership can be decreased.
Due to tight margins and quickly increasing costs in the healthcare sector, servitisation is an emerging trend through which OEMs offer a wide selection of services to hospitals. While various OEMs have introduced servitisation offerings, several characteristics specific to the healthcare sector have caused the adoption of servitisation to be limited so far.
This study sought to identify obstacles, key benefits and success factors for OEMs and hospitals associated with adopting servitisation. By addressing these benefits and obstacles, this study aims to accelerate the adoption of servitisation in the healthcare sector.
This study finds that servitisation benefits both OEMs and hospitals.
Benefits for OEMs
Adding servitised solutions to their portfolio has several important benefits for OEMs. One of the largest benefits is that it enables them to differentiate their product offering, which can result in stronger partnerships with customers and generate long-term revenue increases.
Servitisation has several benefits for hospitals, as well. For example, it eases the financial burden associated with acquiring equipment and transfers risk associated with equipment failure to the OEM. It also allows greater flexibility in scaling equipment needs to meet current demand, and hospitals may benefit from present and future technological developments.
To realise these benefits, it is essential that OEMs and hospitals closely collaborate to overcome the barriers identified by this study. OEMs need to manage the uncertainty associated with long-term contracts by developing an accurate view of the present, as well as the future, to determine the resources needed to deliver services.
At the same time, hospitals should consider the benefits offered by these long-term contracts and how servitisation can help them to better meet business objectives.
By committing to managing uncertainty through close collaboration, both OEMs and hospitals can undoubtedly benefit greatly from servitisation.
DLL is a global asset finance company for equipment and technology with a managed portfolio of more than €35bn. DLL is a wholly-owned subsidiary of Rabobank Group and is headquartered in Eindhoven, the Netherlands.
Authors: Maret Hoesen, Mariam Chami, Diane Aliaga, Alex Papanastasiou of the Rotterdam School of Management, Erasmus University Rotterdam.
