Servitization, the shift from producing and selling just the product to selling an outcome (the result of using the product along with its associated services), has gained significant traction across industries – from music subscription services to lighting-as-a-service. It addresses the changing market needs of customers who increasingly want on-demand access to equipment when needed, without the burden of owning it.
While the concept of servitization is permeating our lives as consumers (companies like Netflix, Spotify, Uber), adoption has been slower among B2B sectors. The healthcare industry in particular has been slow to adopt this model, despite it being ripe with opportunity for hospitals and health systems to free up capital.
Conditions for hospitals and providers
One barrier to adoption is the complexity of the healthcare landscape, particularly in terms of structure, financing and control. A servitization approach impacts decision-makers and influencers across all areas, from Boards of Directors, to doctors, to purchasers and infrastructure specialists – and getting everyone on the same page can be challenging. There are different interests and considerations at all levels. Manufacturers’ offerings too may vary and encompass some or all of maintenance, consumables, insurance and/or uptime guarantees. Servitization contracts are typically for multiple years, so long-term confidence in the manufacturer remains a key element of decision-making. That said, servitization may also allow for greater flexibility to redeploy and upgrade equipment throughout the term than an outright cash purchase. For example, pay-per-use models are gaining traction in various industries because users get the benefits of a rental-type contract (equipment is used as needed, and costs are aligned with revenue), while keeping the equipment consistently available on site, as opposed to being returned to the owner or rental company.
Challenges for the manufacturer
Many manufacturers (OEMs) have the ambition to adopt servitization, but this business model requires a significant shift. New skills are needed to best guide hospitals and providers in the decision-making process. Selling is less about traditional product sales and more about selling the value of a long-term strategic partnership. More than being a supplier, manufacturers often act as the service provider in this scenario – and some OEM organizations need new competencies to be able to achieve this. Manufacturers also must be diligent about monitoring the performance of equipment for the user and adopt performance metrics aligned to a longer-term goals
Partnership potential
Despite the hurdles that the healthcare sector must overcome, servitization offers opportunities to create stronger partnerships that benefit both providers and manufacturers. A manufacturer who can tailor its offering to the provider’s clinical needs at an acceptable user cost can secure a customer for the long-term rather than having to renegotiate every few years. The manufacturer and the healthcare provider function more as strategic partners and work in tandem to achieve mutual goals.
For healthcare providers, servitization may address the risk of equipment underperformance or downtime while preserving capital, matching expense precisely with revenue and creating more flexibility for upgrades, all of which support predictable cash and better financial planning.
In short, few parties within the healthcare sector have taken the step toward servitization so far due to the complex decision-making required and perhaps some fear of the unknown. Servitization also requires specific new knowledge, competencies, and adapted business operations. But while there are still hurdles to wider adoption, there is also great opportunity to improve business relationships, enable cash flow predictability and most importantly, shift more focus toward patient care.
Stay tuned for more from DLL on why hospitals and healthcare systems may want to consider a servitization model.
And to read the full report from DLL, Berenschot and Rotterdam School of Management on servitization in healthcare, click here.