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ADDING VALUE THROUGH INDUSTRIAL SERVICES - A CASE
STUDY OF REMOTE CONDITION MONITORING
Richard Windischhofer1 , Natalia Reen2, Kim Wikström3, Magnus Gustafsson3, Magnus Hindström3
Abstract
In this paper we compare the value creation logics in industrial services of a provider and his customers in order to explain why industrial services fail in delivering value to the customer. The case study used is of a remote monitoring service within an industrial company. The service was being developed at the time of our study from its first generation version 1.0 to 2.0. We find that the original condition monitoring service 1.0 had failed because the provider had focused purely on installation monitoring and did not involve the customers in the service. Version 2.0 of the service was therefore being designed in closer collaboration with the customers, who saw the benefit in achieving optimization of their installation performance rather than just monitoring it. In order to achieve optimization, they had to be actively involved in the service and co-create the value instead of being passive receivers. This required from the provider to realize the actual value - added of their service and change their way of delivering the service, which also demanded change in the company‟s overall business model and value creation logic.
Keywords
Business models, service logics, value creation, remote condition monitoring. Introduction
Industrial companies have started to compete with their business models rather than with just products or services. As a result, they have become highly active in developing service concepts which combine products and services into packages with new types of value propositions to their customers. These concepts promise to deliver more than just a physical product or services in
1 PBI Research Institute, Tel: +358 40 84 64 854, richard.windischhofer@pbi-institute.com Corresponding author
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terms of activities, such as mechanical maintenance, but equipment and services are bundled together and delivered as concepts which aim at maximizing the performance of customer‟s asset and investment rather. Companies such as General Electric, SKF (Rolling Bearings), and Emerson (Automation) have invested for years in new service concepts which complement and enable their equipment offering. SKF for example has been an active supporter of a new engineering discipline which is emerging, called Engineering Asset Management, which is a combination of asset management and mechanical engineering. During our work with industrial companies in recent years we noticed the language in industrial services is changing and that there is a shift from focusing on customer‟s installations and equipment towards a more holistic understanding of the customer‟s asset. Vargo and Lusch (2004a, 2004b) described a similar development in their work on the paradigm change from goods-dominant towards service-dominant logic, which is a general trend that can be observed in a variety of industries and sectors. This is also in line with Wikström et al. (2008) who argue that the service-dominant logic has developed towards business-dominant logic which focuses on providing functionality to customer‟s investment.
This paper is part of an ongoing research program focusing on development of new business models and industrial services for suppliers delivering integrated solutions in project business. While we are developing new service concepts as well as improving existing ones for a number of industrial companies, whose logic of how to create value to their customers business could be described as a mix of product- and service dominant (Vargo and Lusch, 2004a), we noticed that these companies were especially struggling with developing value propositions for their new services. Once they had formulated the propositions, they found them difficult to implement because their present business model did not support these value propositions yet.
Maglio and Spohrer (2008) argue that the creation and the value of new services and service concepts are yet poorly understood by companies and scientists alike and that these concepts fail too often. We therefore aim to contribute to service science with our paper by answering the following research questions:
What are the customer’s expectations from industrial services, how do they differ from the provider’s, and how does that affect the service design and provider’s business model?
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These questions are answered by comparing the value creation logic in industrial services of a provider and his customers in order to explain why some industrial services may fail in delivering value to the customer and thus fail to be successful. The case study used is that of a remote monitoring service within industrial project business, which was being renewed at the time of our study.
We first introduce related theories of service concept design and added value; then provide explain the methodology; and report the findings from the empirical analysis of our remote monitoring case. The empirical findings are then analyzed in connection to theory and the paper ends with conclusions and recommendations.
Services, Service Concepts, and their Characteristics
The term industrial service is used in this paper to indicate services that are offered for customers‟ industrial production and value creation processes (Woodside and Pearce, 1989). In most general terms, industrial services can be described as processes of value co-creation between the main provider, the customer, and other network partners. The services are a combination of intangible actions closely linked to physical products, with concrete outcomes and benefits. Services are delivered by applying competences for the benefit of others (Vargo and Lusch, 2004b). For the purpose of this study Grönroos (2000) and Lovelock (1992) are combined and service is defined as: a process of acts or performances (interactions) between a provider and a user. This process, according to Vargo and Lusch (2008) is a process of the co-creation of reciprocal value, where the output of an entity is viewed as an input into a continuing process of resource integration. Although the process may be tied to a physical product, the performance is essentially intangible. The customer may participate in the service production process to the degree of being an essential partner in the actual creation of the output or value-added, and is thus referred to as value co-creation.
Examples of traditional industrial services include mechanical maintenance, engineering design, or technical maintenance services. They are commonly used within the industry and have established pricing mechanisms, which are usually cost-based or hourly-based. While companies have a long tradition of providing and buying such services, the recent trend has been to package
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them into service concepts that focus on providing a certain value to the customer rather than merely handling, servicing, or repairing a physical installation. The service concept is defined as: a solution that addresses some of the customer’s key issues by providing a clear business benefit to customer’s business. It is performed in a process of interactions by combining a set of actors, tools, services, processes, and knowledge. Service concepts are modularized into separate tasks that are performed during the service process by involving a number of actors, and the scope of the service provided to customers is standardized but at the same time can be customized by combining different modules.
Vargo and Lusch‟s (2004a, b) argue that companies‟ business models change from the paradigm from goods - dominant logic (G-D) towards service-dominant logic (S-D), which is accepted within Service Science as a key theoretical foundation (Maglio and Spohrer, 2008). A key difference in the transformation from G-D to S-D logic is how service provider and client collaborate. In G-D logic, the client is a passive receiver of a service while in S-D logic service is a process of value creation in which both provider and client participate. Løwendahl, Revang and Fosstenløkken (2001) explain that the value of services should match with customer‟s business priorities and strategy, such as cost or quality leadership. However, by using Wikström et al. (2008) we would like to emphasize that this perspective is too narrow and we believe the service should not just support the customer‟s business priorities but the customer‟s business model. Service concepts require a particular, collaborative way of working and information flow between the customer and service provider, but these aspects are significantly influenced by the company‟s business model. In the context of industrial project business, Wikström et al. (ibid.) distinguish between four types of relationships and customer‟s business models:
1. In product-driven relationships, mature technologies with relatively low complexity are used. The customer-supplier focus is on efficiency and the customer often prefers being in charge of the installations, and may be reluctant to outsource non-core operations.
2. In service-driven relationships, mature technologies with relatively low complexity are used. The customer may be looking for suppliers with strong competence as services providers because they are often willing to outsource or make service agreements.
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3. In innovation- and technology-driven relationships, the customer and supplier face complex environments, with new technology, and collaborate with each other. Customers in this group often see themselves – and their suppliers - as technology leaders, and suppliers are technology and innovation partners.
4. In business-driven relationships, customers operate with new and complex technology and see themselves as industry leaders and require the same from their supplier. Customers are very commercially oriented; they may themselves know rather well how to provide services because they are often highly specialized and deal with complex challenges. Here, the supplier is not only a technology partner but also enables the customer to execute their business model, often by providing crucial new technology, making proactively suggestions for investments, and providing expert services.
We agree with Løwendahl at al. (ibid.) that customers, providers, and other actors are stakeholders in the value creation process of services that provide their own input and capture their own part of added value. The article argues that the business model is a major factor in enabling and allowing the customer to generate the added value from the service they need, and therefore it is believed that a product-driven customer will have it difficult to create value for them within a value creation process which was designed for business-driven customers.
Wikström et al. (2008) also go deeper into Vargo and Lusch‟ (ibid.) S-D logic and split it into two parts in order to emphasize that there is a customer-centric logic and a business-centric logic, whereas the former focuses on serving the customer with customized solutions and by focusing on the immediate scope of the service, while the latter logic focuses on improving the functionality of the customer‟s asset or investment by collaborating with the customer during service design and delivery and therefore becoming an active part of the customer‟s value chain and value network.
As a result, the customer should preferably be involved in designing the service package (cf. Løwendahl, 2001) and needs to be trained to contribute to the quality and outcomes of the service (Bowen and Youngdahl, 1997). In expert services (i.e. services that provide solutions to complex problems), the core service is often standard while connected services are combined as
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modules in order to customize the service package to match the customer‟s needs (Lehtinen and Niinimäki, 2005).
Figure 1 below shows the service process, in which provider and customer participate in different action modules which are linked to each other and which are required in order to create the outcomes of the service. In each module the provider and customer may have different roles and their involvement in each action module differs between modules. For example, the customer Y and provider X collaborate in action module 3, which could be for example “management reporting” – a report which tells the company‟s management level the condition of its assets and actions necessary to make improvements. In this module, the provider‟s role is to collect and integrate the results from the monitoring, interpret them based on its in-house expertise and draw conclusions, while the customer‟s role is to provide necessary data, contribute to the analysis by verifying it and providing their opinion and expertise from operating the assets, telling the provider what kind of information the management is after, and how it should be presented in the report in order to be useful support for decision-making.
Figure 1 Model of a Service Process
As shown in the figure above, the provider and customer collaborate in the service process in order to create a number of outcomes, and it needs to be emphasized that also other network actors can be included in this process, for example the provider may have subcontracted a
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module to another company, or at the customer end, the operator and owner of the asset are different parties but both need to be involved along the process.
Besides the question of service design, one of the key issues is to actually identify a suitable service concept and make a value proposition that corresponds to the customers‟ and providers‟ business models and priorities. In order to identify the service concept and value proposition, the first step is to get a clear overview of the actors involved in the value creation network. Cova and Salle (2008) developed a framework for processing customer network value propositions by:
1) Identifying the actors in the network; 2) Targeting key actors;
3) Identifying the mobilizing factors of targeted actors; 4) Designing how to approach them; and
5) Setting up a value co-creation approach together with each customer network actor. Based on our experience from working with industrial companies, we argue that it happens too often that industrial companies sell their core competence instead of trying to find out what distinctive competence the customers are looking for, and how that is combined with the core competence. It is argued in this paper that what the provider offers needs to be consistent with its own business model (Wikström et al., 2008) – but it is equally important that the offering matches the distinctive competence (cf. Mooney, 2007) the customer is looking for in the provider. Mooney (ibid.) sees the distinctive competence as the competence the customer is looking for in a supplier or service provider, and therefore clearly distinguish it from core competence, which refers to what the company does best (Hamel and Prahalad, 1994).
Figure 2 depicts the model as a method of matching the customer‟s business priorities and business model with the provider‟s value proposition. This process is the result of a series of practitioner workshops and our larger program on research about industrial project business and services. The method starts with:
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1) Customer‟s business priorities: identifying the customer‟s business model and business priorities, this relates to Cova and Salle‟s (ibid.) „mobilizing factors‟.
2) Distinctive competence: the customer‟s business priorities creates the need for a distinctive competence, this is the competence the customer is looking for in the provider (Mooney, ibid.).
3) Service concept: identifying the service concept which matches the distinctive competence and the provider‟s business model; identifying the key actors, modules, and outcomes.
4) Value proposition: the service concept‟s method and benefits are then formulated into a value proposition which matches the distinctive competence.
Distinctive competence, service concept, and the provider‟s and customer‟s business model need to match in order for the provider to be able to create the benefits which were proposed in the value proposition.
Figure 2 Model for matching distinctive competence with service concepts
The value of service concepts
There is plenty of solid research in the area of value creation (Brady, Davies, and Gann, 2005; Ulaga, 2003; Lapierre, 2000; Walter, Ritter, and Gemünden, 2001; Grönroos 2000; Möller,
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Rajala, and Westerlund, 2007; Spohrer, Maglio, Bayley, and Gruhl, 2007). Researchers describe service systems as value co-creation configurations of people, technology, and internal and external service systems connected by value propositions and shared information (such as language, laws, measures, models). In the value chains, or in the value-creating systems, value is constructed, perceived, and shared by individual companies via co-production, exchanges, and relationships. In general, value can be a low price, desired outcome, quality for the price, or balance between benefits and sacrifices (Zeithaml, Bitner, and Gremler, 2006). For the production facility owners, such as for the consumers of industrial services, the value could be operation and maintenance process effectiveness, improved maintenance quality, improved safety, reduction in costs, reduction in execution time resulting in reduced downtime, or improved availability and quality of production output (Kuusisto and Meyer, 2003).
The relationship with customers is the main driver of value creation. According to Wilson and Jantrania (1994) value is a result of collaboration which increases the competitiveness of partners. Due to the high level of customer involvement, the customization of service concept and value-co-creation process plays a crucial role in creation of value for all parties (Anderson, 1995; Liljander and Roos, 2002, Möller and Torronen, 2003).
Value co-creation is more effective if there is strategic congruence between the client and the service provider. This congruence exists when both the client and the service provider have sufficiently related value creation strategies or value creation logics. Efficient value creation in client - provider relationships is built upon motivation, commitment, and trust (Möller et al. 2007). Customers have a decisive role in the realization of the end-value out of the potential value in any service provider‟s value proposition. This directs attention from the providers‟ value production to understanding clients‟ value-creating systems and the capabilities involved, and leads to an understanding of the client-provider collaboration (Möller et al. 2007).
It is therefore argued that the total value will be higher if the service concept directly or indirectly supports customers‟ strategic goals or intentions. Different actors of value-creating system provide their own input in value creation and, in turn, „capture‟ their own part of added value. Measuring, planning, and managing of value is an important part of business process. Fully admitting customer‟s dominant and decisive role in value creation logic, this article finds it
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important to examine value creation process from service provider point of view. The point of departure is Løwendahl et al. (2001) view on value generation in professional service firms. Successful [companies] generate value in two distinct ways: they provide value to their clients and they provide value to owners and firm members. Owners gain both from financial returns and knowledge development, as the latter, to the extent that new knowledge is retained within the firm, is in many ways similar to retained earnings (Løwendahl at al. 2001).
We argue that it is of paramount importance to understand the needs of each party involved in service development and delivery, and build value according to clearly defined partners‟ needs. Methodology
The methodological approach in this article can be described as a case study (Eisenhardt, 1989) that has been investigated by applying processual and collaborative research approaches. Studying organizations and phenomena as process has been argued for example by Pettigrew 1997; Hinings, 1997 who argue that issues of time, agency, structure, context, embeddedness need to be traced in order to understand the dynamics that are the cause those phenomena under investigation. The data was analyzed by following collaborative inquiry as the research approach (Pasmore et al. 2008; Werr et al. 2008; Mirvis et al. 2008) where research questions were defined together with practitioners and data collection and interpretation was alternated with workshops in order to validate the results. This approach is used in order to reciprocate with the organization that was studied and with other practitioners as well, but the main idea behind reciprocating was not to show respect and transparency (Pettigrew, 1990; 1997) but to co-create new knowledge in order to reduce the gap between creating theoretical knowledge and its relevance and possible application to practice (Norris, 1982).
The data which was used for this paper has been collected during a business development project which was lead by the lead author, and therefore we acknowledge our role as active participants not only in the research process but also in the process of shaping the industrial service provider‟s business model and value creation logic.
The case used is that of an industrial company that has been further developing and re-launching its existing remote condition monitoring service concept. During this process, information was
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collected about the existing concept that was going to be renewed, the customer‟s opinion of the existing concept and their ideas for a new version, and the provider‟s own employee‟s ideas about the existing and the new concept.
The data comprises qualitative interviews with 36 employees from the industrial service provider (10 with sales responsibility and 20 with responsibility for technical issues); and 9 corporate customers from the industrial project business industry, of which 1-3 persons per company from different management levels and responsibility areas were interviewed. Altogether, interviews from 32 persons on the provider side and 23 persons on the customer side were collected. Interviews were tape recorded, transcribed, and coded by using NVivo and MS Excel. The interview data was categorized into comments about the customer‟s industry and business model; value proposition and value-added; and how the service should be provided. The statements from the service providers were contrasted with their customer‟s statements. In addition to qualitative interviews, workshops were held continuously with the service provider to validate results and receive their input.
The summary of our analysis is presented in a number of tables by contrasting the supplier‟s and customer‟s viewpoints of the expected value-added from the service concept.
Remote Monitoring Case
Introduction
The case company is providing large industrial equipment and solutions to the industrial project business and has in recent years developed a service in which this equipment can be monitored from the maker‟s monitoring center in order to inform the operator of their condition.
Generally, remote monitoring of installation‟s conditions means that sensors which are installed at critical places at the equipment pick up different kinds of data (such as exhaust temperature) and transmit it via ICT network to a receiver which is often a monitoring center where the data is collected and software programs are applied to monitor the sensor data, identify critical incidents, and interpret the data in context of a number of factors that may affect installation performance. A typical case of remote condition monitoring is when an energy utility monitors the inputs and outputs of its wind turbines in a remote mountain area from the distribution center
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of it‟s headquarter offices in the capital. The management can see which turbines are running, how much energy they produce, and customer and manufacturer – who is monitoring the turbines as well – can easier and faster identify critical incidents, maintenance and repair needs, and improve the performance of turbines.
The empirical analysis is divided into three sections. First is shown how the service concept‟s value proposition was identified by using the framework proposed in the theory section of this paper. Subsequently, the provider‟s and customer‟s logic regarding the outcome and value proposition of the remote condition monitoring service are compared; and finally it is analyzed how the service should be provided.
Figure 3 shows the process we followed in order to identify the renewed service concept for remote condition monitoring. The customer‟s business priorities and the distinctive competence they were looking for were identified. Based on this information, the service concept and value proposition are clarified. Both the distinctive competence and the service concept created new requirements for the provider‟s business model, which were identified as well.
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To go into more detail, Table 1 shows that the provider has mainly thought about the remote condition monitoring as being a service where operations are observed in their monitoring center and customers would be informed about maintenance needs, which would hopefully lead to extending the time between pre-scheduled maintenance intervals and thus lead to cost savings in maintenance costs. However, from the customer‟s point of view observing the equipment parameters was only a small part of the expected value. Customers appreciated to have the manufacturer performing the monitoring but the essence was to use this information for optimizing the performance of installations and their overall asset. In order to achieve this, however, the customers saw it as necessary to be involved in the monitoring for example by providing information that cannot be collected with sensors but have their personnel perform regular visual inspections and data collection which is then sent to the provider‟s monitoring center. Customers demanded to be part of a continuous dialogue with the provider and perform the service together, willing to invest a significant amount of their own work hours.
Table 1 Outcome and Value Proposition of Service
Provider‟s Logic Customer‟s Logic Gap Action
versus outcome
Monitoring of equipment is main point for provider. Optimization would require advice on basis of monitoring data, which is seen as too unreliable by provider.
Customer wants their overall asset to be considered - not just the main equipment. Information collection must lead to optimization – optimizing is the key
Customer wants their asset to be optimized, but provider focuses too much on main equipment. Optimization is priority for customer, but for provider focuses on monitoring.
Value from service
Believe that customer will be satisfied if he is served and does not need to be involved. Main benefit of the service is cost reduction for customer by extending the maintenance intervals.
Customer wants to be involved because he needs to bring in the knowledge from operating the installation and the operating conditions. Also seen as good way to ensure they get the value added they pay for. Priority is better performance – not necessarily reducing costs. Customization and flexibility of maintenance schedules is more important than extending maintenance intervals.
Customer wants to contribute, learn, and be integrated. Major goal for customer is to co-create the outcome of the service with the provider. Being involved is seen as value but being served is seen as disadvantage. Provider advertises the service with being able to reduce costs but customer thinks performance improvements are more important – and more realistic than just reducing operation costs.
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In Table 2 it is shown how the provider‟s and customer‟s logic of expected outcomes affected their ideas and how the service should be delivered. The provider thought that one of the main purposes of remote monitoring was to eliminate the involvement of the customer and humans in general, because they understood remote monitoring as automated monitoring. In order to provide a convenient service to the customer, the provider believed that customers should not be involved in the monitoring mainly because they would find it bothersome but also because they were perceived as a risk factor because they may lack the necessary knowledge.
Table 2 Method of Service Delivery
Provider‟s Logic Customer‟s Logic Gap Involvement of
personnel
The aim should be that remote monitoring minimizes operator‟s role. Monitoring is at its best when errors are detected automatically from afar, without persons involved.
Errors need to be detected automatically from afar but personnel are crucial to interpret what the information from the monitoring system and decide what to do. They add crucial value.
Provider tries to minimize involvement of personnel because system should be able to serve the customer. Customer regards personnel as value-adding to the system because they can interpret the data.
Problem solving and expertise
When a problem with the provider‟s equipment is detected, the provider‟s experts should come up with a solution before contacting the customer again. This shows that provider has the expertise and can handle problems.
Provider should solve problems with customer together. Provider cannot be the expert because only the customer has superior knowledge regarding operating conditions.
Customer says if they are not involved in the problem solving it will be ineffective. Co-creating the solutions is important and allows combining the expertise of customer in operations and expertise of provider.
Transparency Equipment works well if it works without errors. Data about errors should not be shown because customer could take advantage of it and use it against provider.
Customer is aware they operate complex technology, which sometimes has errors. Error statistics should be used to warn customers proactively of known faults in the equipment.
Provider is ashamed when something breaks and tried to hide it at least until problem is solved. But customer is aware technology is complex and errors happen, and it is more important how problem is solved than trying to achieve perfection.
In the ideal case, so the provider thought, the monitoring would warn them of errors and they could solve problems without the customer‟s help or without them knowing too much about them, which was largely shaped by the provider‟s pride in their technology and the believe that equipment errors would damage their reputation. The customer, on the other hand, was of the opinion that the monitoring will require significant involvement and diagnostic abilities from the provider and themselves, and that they will have to work together to solve problems. Regarding errors with the equipment and operations, customers believed that it was rather normal that errors
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occur since they operate complex equipment in challenging conditions, and that the most important issue for them was not to have equipment that functions flawlessly but to have a provider they could rely on when things go wrong, and solve problems together.
Table 3 provides an overview of the required elements in the provider‟s business model and the key tasks in the remote condition monitoring concept, comparing the current version of remote condition monitoring 1.0 (RCM 1.0) and the suggested condition monitoring 2.0 (RCM 2.0). The elements of the business model were divided into collaboration, customization, and transactional approach. Regarding collaboration, the provider needed to move from for example passively receiving service calls towards pro-active problem identification and joint problem solving. Customization means that the provider‟s business model needs to allow flexibility and customized maintenance instead of rigidly sticking to routine maintenance intervals and scopes. The transactional approach needed to shift from for example handling spare part orders towards managing the customer‟s spare part consumption, which also meant to accept selling fewer spare parts, but being paid for the service of reducing parts expenditure. These three elements of the provider‟s business model needed to change in order to enable to new service concept to function.
Table 3 Overview of Business Models for RCM 1.0 and 2.0
Elements of Logic Provider’s business model according to RCM 1.0
Required Business Model and Remote Condition Monitoring 2.0
Business model for provider’s
service operations
Collaboration Service calls Pro-active problem identification and joint problem solving
Customization Routine maintenance Customized maintenance
Transactional approach Spare part orders Spare part consumption management
Key tasks in remote condition
monitoring service
Monitoring Remote monitoring by service provider only
Integrated monitoring by provider, customer, and provider‟s service personnel
Support Technical support Joint problem solving
Diagnostics Analysis independent from customer Joint diagnostics
Reporting Semi-automated (information from sensors complimented with technical implications written by provider‟s staff).
Non.-automated (all monitoring information considered and interpreted together with customer).
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Referring to the key tasks of the service concept displayed in Table 3, the provider had to move from performing the monitoring entirely by it towards integrating other information from the customer‟s site and the service engineers that sometimes visit the customer, but whose knowledge and data they collected was not utilized in the monitoring. Regarding the support, the provider had to switch from providing technical support towards joint problem solving, which was a key module in the new concept. Diagnostics, which had been in version 1.0 a shallow, independent analysis, had to turn into more sophisticated and joint diagnostics; and reporting had to turn into a process of reflectively using a wider range of information to be interpreted together with the customer, instead of relying on results that could be reported based on sensor data alone.
Figure 4 Transformation of monitoring tasks – from installation
Figure 4 shows the transformation of information and focus which was necessary in order to move from RCM 1.0 to RCM 2.0. On the left hand side, RCM 1.0 was about monitoring the installations remotely, without including any other information and by focusing just on the installation as such. RCM 2.0 however, meant to include also the customer by integrating the information which is collected by the engineers and operators on site and the knowledge and experience they have. Further, the provider had to integrate their own maintenance crew‟s information, reports, and knowledge about the customer‟s operations and the condition of their
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installations, history of problems, and to draw comparisons of installation performance between pre- and post-improvement actions. Overall, version 2.0 required the provider to consider a wider frame than just the installation which was being monitored, and therefore considering the customer‟s asset, which includes other installations and processes relating to the installation. Discussion
As was argued in the beginning of this paper, we have seen over the years a number of industrial companies that faced problems with identifying the value proposition of their service concept and co-creating the service together with their customers. Therefore, a process for identifying the customer‟s business priorities, the distinctive competence they are looking for in a supplier, and how that should be matched with a service concept and value proposition, was demonstrated in the empirical section. By starting from the customer‟s business priorities and business model, the supplier is forced to build an understanding of the customer‟s business and what they see as added value to their business. However, there is a risk of creating service concepts that are too tailored and therefore limited to a small number of customers with advanced business models, because those customers are also more likely to participate with the supplier in new service development. Considering Wikström et al. (2008) we argue that the RCM 2.0 service concept requires customers with centric logic rather than product-centric ones since business-centric logic already use business models that can work with advanced service solutions. However, in order to sell the service to a larger customer base and not being limited to the most „advanced customers‟, the provider can modularize the concept in ways that allow selling packages of the concept to different customer types, according to their business model. This is particularly important since we have seen that industrial companies tend to develop new services together with their most advanced customers but face problems to gain economies of scale and selling to a larger customer base – often because they have not thought of how to develop a modularized offering that also allows customers with less advanced business models to purchase a suitable service module or combinations thereof.
The provider had, according to its logic and business model, developed RCM 1.0 in order to extend the maintenance intervals and provide the customer primarily with the benefit of cost savings. The provider perceived this as the value the customer wanted but it actually contradicted
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the customer‟s business priorities and expectations in the service. Since the customer wanted flexibility, customization and better performance (RCM 2.0), there is a significant gap in the basic notions between the provider and the customer about what constitutes the added value of the service. The main reason for this gap originates from the provider‟s business model, which did not facilitate a way of working and a dialogue of the kind that co-creates value with the customer. Therefore, the provider was not able to find out what the customer wanted and as a result, the provider had developed a service concept that the customer was not interested in. Strong dialogue on a strategic level would assure better understanding of customer‟s expectations. We assign the main cause of the value gap to the provider‟s business model because our conversations with the customers had shown that most of them made significant efforts in the years prior to the renewal of the service concept to get the provider to change its practices and value proposition, without success. Figure 5 therefore focuses on the process of identifying value propositions, and the provider‟s business model and value creation logic.
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The effect of the business model on communication between customer and provider can be demonstrated with the following example of a „misunderstanding‟ between the two parties, which had noticeable influence on the interpretation of needs versus offerings. Since the customer was bargaining hard on RCM 1.0 and some customers even demanded to receive the monitoring free of charge and on top of the equipment, and emphasized they wanted to use the service to reduce their maintenance costs, the provider assumed that customers altogether were very cost-conscious. This was not the case because the customers wanted optimization and risk management (which is part of the value proposition of RCM 2.0) but they were not convinced that the provider would be able to deliver that kind of value and therefore, they focused on getting short-term cost benefits instead of emphasizing operational quality aspects, because customers were not ready to pay for the service in its incomplete (RCM 1.0) form.
As mentioned above, modularization of the service concepts can help providers satisfy a larger range of customers. In this paper it is argued that in some instances the provider has to take that thought one step further and modularize its business model in order to have value propositions not only for business-driven customers but also for example product-driven customers. It is argued in this article that it is the differences in business models that create misunderstandings and wrong assumptions between provider and customer and expect that modularization clarifies the offering and value-added for both parties. A provider with multiple business models in order to satisfy a larger clientele is not seen as a working solution in this article, and modularization is therefore proposed as a way to proceed. Modularized business models are easily perceived by the customer as being customized, which also adds value to the service.
We saw from the empirical analysis that customers clearly required a different business model and value creation method from the service provided than the one that already existed. Therefore, the delivery of the renewed service concept RCM 2.0 triggered a number of changes in the provider‟s business model, which are summarized in Table 4. The co-creation aspect, as described by Vargo and Lusch (ibid.) was one of the most significant factors in the new service concept, besides the change from „monitoring‟ towards „optimization‟, and from „installation‟ towards „asset‟. Increasing the transparency and trust in the relationship were key factors as well and it was necessary for the provider to recognize services as concept rather than as merely as task.
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Table 4 Link between service concept and provider’s business model
Elements of Logic
Requirements of RCM 2.0 Requirements for provider’s business model for RCM 2.0
Requirements for customer’s business model for RCM 2.0
Task focus Monitor and maintain Know how to optimize Commitment to developing own
operations
Asset focus Installation and equipment focused
Asset and investment focused Outcome- and effectiveness-focused and accepting that improvements take place incrementally
Service logic Service as activity Service as concept Service as partnership
Collaboration Creating value for the customer
Value co-creation and trust Long-term perspective on partnership, and return on investment
Operational quality
Technical support Risk management Process improvements
Problem solving
Conceal problems Transparency and co-solving of problems
Invest in staff to understand problems and risks and how to manage them
Table 4 summarizes both requirements on customer‟s and provider‟s business model and way of working, and which key characteristics it needs to fulfill in order to be able to participate in the value co-creation of the service concept. By paying attention to the requirements from both partners, we emphasize that a functioning service concept needs a provider who knows how to co-create value with the customer (and other network partners) – but it is equally important that the customer knows as well how to contribute, which places a part of the responsibility on the customer‟s side.
In order to clarify the creation and added value of industrial services, the critical elements in a service development process of building a second-generation remote condition monitoring service is demonstrated. Regarding the development process itself, it is shown in this paper that the provider‟s business model is a key factor, which has been somewhat, neglected in literature. Further, also the relevance of the customer‟s business model is a key factor and is not sufficiently recognized in literature. Instead, literature seems to be more focused on the features and elements of services and service concepts and therefore does not pay enough attention to the fact that service processes are embedded in provider‟s and customer‟s business models and therefore are enabled through them.
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The case presented is an example of what the authors have experienced in the industrial business with other companies, for years. The emphasis in service development and value creation seems to lie – as in our case – in the application of technology rather than creating functionality for the customers‟ asset, which means industrial companies focus too much on inputs than outcomes. A particular logic resided in the provider which represented a clear obstacle for creating value together with the customer because the supplier thought it needs to provide flawless technology – while the customer expected problems and mostly cared about transparency and solving these problems together. Thus, involving the customer in the service and value-creation process is a key success factor for the new generation remote condition monitoring service, but it requires changes in the way of working, expertise, business processes, and information flow.
Conclusions and Recommendations
In this paper we contrasted the value creation logics and business models of an industrial solution provider who renewed their remote condition monitoring concept in order to better match its value proposition to customer‟s business priorities. Our objective was to use this case in order to demonstrate the difficulties and challenges industrial companies are facing when building and developing their offering, especially when they try to include more services in what otherwise is a goods-dominant business model and value creation logic.
Our findings indicate that the supplier‟s goods-dominant logic prohibited recognizing the added value of remote condition monitoring from the customer‟s point of view when building its first generation service (RCM 1.0). The supplier focused on the reliability of their technology and assumed that customers are passive receivers. In contrast, the customers saw the technology just as a means to optimize the performance of their operations; and they demanded to be actively involved in the service process in order to co-create the value. This was finally recognized by the supplier when overhauling its service concept and designing the second generation RCM 2.0. In services the final value is not pre-produced in the factory or a back office (Grönroos, 2000) but created in interaction with the customers and focused on the customers‟ value creating processes – but this type of value creation mechanism requires from the service provider (as well as from the customer) a business model which enables a number of key actions, including optimization, outcome-based thinking, asset-oriented thinking, and collaboration. Thus, the
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service providers‟ systems and operatives as well as those of the customers play an integral role in the provision of services. In the case study, active and business-oriented dialogue between provider and customer would have reduced misunderstandings and misconceptions about the value proposition of the service when it was originally created. Functioning information exchange on from technical and commercial perspective and with operational and strategic focus must be a priority when developing business models in order to secure that all parties have a common understanding of the value they aim to create. The lack of communication is, at least to some extent, a product of business model differences between provider and customer because differences in business models and value creation logic prohibit the use of common language and value creation concepts.
In our case study, implementing the service logic which matches the customer‟s priorities meant for the supplier to change its business model to involve the customers in the value creation process; provide consulting and diagnostics that utilizes monitoring data on a higher technical and commercial level; and developing value-based pricing methodologies. By modularizing its business model the supplier was able to consider that the firm would have to serve a variety of customer‟s business models in order to sell the service on a larger scale.
This paper contributes to industrial service literature by clarifying how the adapting of a new service logic affects the design of the service delivery process and the supplier‟s business model. The results have implications for the value-based pricing of industrial services because identifying the services‟ added value and having suitable delivery processes in place are pre-requisites for implementing value-based pricing, which remains challenging for industrial companies.
We contribute to service science and s-d logic by clarifying the nature of value co-creation and formation of value propositions in relation to provider's and customer's business models. It is emphasized in this paper that co-creation in industrial services requires not just a provider with the right business model, service offering, and value proposition - but also the right customer with suitable business model, service demand, and value expectation. Since service concepts are oriented towards output, functionality, value-in-use, outcomes, and optimization, they focus on the customer's asset and investment rather than just the installation or a service as task. Because
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this service process, which is a process of value co-creation, is outcome-oriented it requires the input from all necessary actors, which co-create the value as partners. However, these partners need to work together from the beginning when for example designing or customizing a service or at the beginning of service relationship when the priorities and goals of the service are set. This requires clear formulation and communication among both partners (customer and provider) and although the main responsibility for crafting a suitable value proposition lies with the seller, we would like to emphasize that customers need to become more mature and effective in communicating their value expectations to their potential providers.
Literature has focused mostly on how the seller can improve its understanding of the customer's needs and priorities but this article argues that also customers have a duty to make themselves understood. We therefore encourage further research in how customers, in industrial business particularly, can communicate their value expectations in order to assist their supply partners to provide them with more effective value creation and co-creation. This paper is aiming to contribute to strengthening the fundamentals of service science and a framework for understanding how service systems operate and interact. Also Vargo et al. (2008) argue that the consumer-producer distinction is increasingly inappropriate because of the co-creation and partnership aspects in service systems.
Further research is also needed on whether providers should try to alter customers‟ business models in order to make them productive users of advanced service solutions. The advantages from purchasing advanced service solutions should make at least some product-driven customers interested in the concept. Modularization of business models can also be of interest in further research.
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