How SKF’s Servitization strategy drives industrial growth

World War II has been one of the most savage blots in Europe’s history. The D-Day landings on France’s Atlantic coast that turned the tide in favor of the allies remain the war’s defining moment. However, most people don’t realize the most savage and dangerous air campaign during the war involved a century-old mechanical invention – the ball bearing.

The simple bearings manufactured in Europe in large quantities were vital for all mechanized operations. Everything from engines to weapons to manufacturing machines required ball bearings to function – in fact, for any part, moving in a mechanical function would require a ball bearing. The industrial revolution had already made Europe the center of industry, and the simple bearings kept that industry functioning and Europe in motion.

The bearings, while simple in nature, were tough to manufacture precisely. The bearings were required to be manufactured accurately in standardized sizes. A micrometer-wide deviation could throw a shaft out of balance and ruin the machine or an entire factory. To eliminate a country’s supply of bearings would completely stall its economy. In this case, it would also knock the country out of the war.

The Allied planners identified the German ball bearing industry as the second most vital target for a ‘point-blank’ bombardment. Operation Pointblank soon took place where the Allied Air forces suffered 50% casualties just to knock out the factories producing this tiny simple component.

Allied planners later estimated the bombing took out 33% of Germany’s industrial and war capacity and shortened the war by years if not decades.

Fast forward 70 years, and bearings have evolved beyond recognition but what hasn’t changed is that they still drive movement and make industrial growth possible. At the forefront of keeping the world (and the economy) moving is the Swedish giant Svenska Kullagerfabriken popularly known as SKF. This century-old company is responsible for 20% of the total bearing output in the world and provides 27% of India’s rotational bearings needs. All things considered, SKF makes 27% of India’s industrial output and mobility possible.

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SKF active magnetic bearings levitate the rotating shaft using magnets, enabling friction-free rotation. pic.twitter.com/vCo7f4Wvr6

— SKF (@SKFgroup) July 21, 2014

SKF: From humble beginnings to world-altering innovations and a winnable service strategy

Svenska Kullagerfabriken was founded in 1907 in Sweden on the back of a patent for a revolutionary self-aligning type of bearing. The bearing’s inventor Sven Wingquist was one of the founding members of the newly established company.

The new bearings were a massive improvement over the crude bearings available in the market, and SKF saw rapid success. Within a decade, SKF had broken out of the European market and established subsidiaries in the USA and worldwide.

The company was so successful in manufacturing bearings that it invented a new type of automobile bearing – the Volvo bearing. SKF later founded an offset company to manufacture cars that established itself as the Volvo group.  

One of the reasons for the SKF group’s longevity has been the ability of its leadership to sense technology trends of the future at a very early stage. SKF has been at the forefront of incorporating experimental technology into its products. This has ensured it continued to stay relevant as the fundamental nature of almost all industries changed in the computing age.

When computers and the space race were taking off in the 70s – SKF launched the ambitious program called ‘Production Concept for the 80s.’ The outputs of this program revolutionized the manufacturing industry, paving the way for automated manufacturing.

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In the 1980s, SKF was one of the first product-based companies to include sensors and actuators as a part of their products. These efforts by SKF laid the foundation for the Industry Internet of Things to emerge as a dominant concept in the 21^st century by building upon the use of sensors to gather data and generate insights.

All of these innovations were combined into one great leap forward in the 21^st century. The company sought to combat declining revenues from one of its largest clientele, the automobile industry, through a new business model – Servitization.

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Circular economy is aimed at eliminating waste and continuous use of resources. Re manufacturing is in line with this concept. Instead of buying a new product, you will save material, energy and labor. At the end, you will have a product that is as good as new. #SKF pic.twitter.com/lnMVyFeX4f

— SKF in India (@skfindia) January 31, 2020

So, what exactly is Servitization and how did SKF perfect its sales & service strategy with it?

Servitization in its simplest form is akin to the subscription where the company uses its products to sell a service outcome to the customer instead of a one-off sale. Servitization is simply the strategy of providing services as an additional revenue stream for your installed product base.

This works out well for both the client and the manufacturer. The client gets assured uptime of the installed or used product base more efficiently than in-house maintenance. The manufacturer remains competitive, holds a market share, and gains additional revenue streams in a market flooded with low-cost products. Many companies have developed a strategic mix of products and services, and these are often bundled together and sold in packages.

While it sounds highly beneficial, it’s challenging for a product-based entity to pull off effective and efficient servicing while maintaining profitability. The capability set required to be a capable service organization is entirely different from the product and manufacturing expertise.

Companies that have done well in Servitization have overwhelmingly been at the top of their field as a product entity before offering services. This can stem from the fact that top products companies have a culture of developing the best possible products over merely selling the highest number of products.

This kind of drive and culture for excellence and improvement is a must-have for a service organization. Companies like SKF, Xerox, Rolls Royce, Gilbarco Veeder-Root, Caterpillar, Alstom have all done well in the Servitization model – and what all of them have in common is a history of innovation and market leadership.

The level of Servitization that SKF has offered far outstrips its competition in its scope and comprehensive coverage. Conventionally, bearings have been tendered on a lumpsum basis. SKF found this approach to be too transactional and ignorant of interrelated business realities.

SKF, with its vision of creating a world of ‘reliable rotation,’ found it difficult to ignore the industry-specific aspects which affected its equipment’s performance and impacted the total cost of ownership. To tackle this aspect, SKF developed the ‘Rotation for Life’ concept, which sold ‘Rotation as a Service.’ The aim was to create and sell integrated solutions instead of focusing on lumpsum product sales.

The program boldly sought to increase the life and overall efficiency of their products through continuous monitoring and service. Longer product life would guarantee lower replacement sales to the same client, but SKF gambled on an increase in overall sales and retention by providing more reliable products and seamless service.

Instead of a simple contract for product sale, SKF packaged the product, the technology, performance agreements, monitoring, maintenance, failure detectability, reliability services, and future upgrades into an integrated contract. The SKF ‘Rotation for Life’ program was a run-away hit with the manufacturing sector. The sector was looking for sustainable solutions that reduced their equipment’s overall lifecycle cost and environmental impact.

Purchasing SKF’s Service as a Service package enabled to unlock the following benefits in an era of margin pressures and ESG considerations –

• Improved equipment uptime due to rotational reliability and monitoring
• Lower OpEx costs through continuous servicing leading to peak performance and reduction in total lifecycle cost of ownership.
• A lower CapEx over the factory’s rated life considering reduced replacement and shutdown costs
• Better revenue management through a more reliable and stable maintenance program where the disbursal amounts and periods could be predicted accurately
• A very short payback period compared to the exponential benefits offered in sustainable plant operation, reduction in power wastage and improvement in several ESG metrics.

From Industry 4.0 to Servitization 2.0: Innovation Leadership enables Market Leadership

SKF has not stopped at just providing integrated service packages; it uses its early foray into IIoT and Digital Technology to maintain market leadership. SKF adopted the digitization of its manufacturing processes from the early 1980s. After IIoT, the company has added predictive analytics and proactive maintenance to the technology base that guarantees maximum uptime to its client.

This creates additional opportunities for SKF. Not only is it offering a product plus service package to the client at higher margins, but it is also leveraging the data from IoT sensors to design better service packages or come up with new revenue stream ideas.

SKF may have been the first company to perfect its product and service strategy mix, but by no means is it the only one. Several notable companies are perfecting their own Servitization strategies to meet the dynamic demands of their target industries.

Rolls-Royce has Servitized its jet engines and now sells engine uptime as a service instead of just selling the engines as a product. Reliability is a critical factor for airlines. Rolls-Royce’s aerospace clients are happy to pay the premium for near-perfect reliability while also saving up on total life cycle costs, replacement costs, and contractual liabilities from engine failures. The experiential luxury strategy of Rolls Royce

Not to be left behind, General Electric too utilizes cloud-based computing services and sensors to generate usage statistics for its installed jet engine base to predict and prevent failures and critical issues.

Alstom offers a TrainLife Service package which includes comprehensive maintenance services which prioritize equipment performance. The basic principle for Alstom is to generate value by reducing the number of hours lost by customers to downtime. Heavy equipment manufacturer Caterpillar is another industry leader offering Servitized packages.

The Cat Product Link offered by the company provides real-time updates and enables preventive maintenance monitoring of assets. The overall effect has been a marked increase in product life span in harsh environments and rugged work requirements with reduced lifecycle costs. The data generated from many of these packages can also be cleaned up and presented as insights to the client to enable better decision-making and the most effective use of the product installed base.

The types and scope of Servitized packages are limited only by the company’s ingenuity and technological capabilities. Powered by the emergence of new-age technology like Blockchain, Distributed Applications, Digital Technology, and IIoT, many industries are shifting away from a product-based approach to a strategic mix of products and services.

This approach offers the best possible application of emerging technologies. It improves sales through better product performance and enhanced customer loyalty by making the production company a stakeholder in the customer’s success instead of remaining a mere vendor like their competitors.

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