Service orientation is about serving customers better by breaking down their needs into a hierarchy of services and reflecting this in the organisation and information technology (IT) systems of the enterprise.
In the wave of digitalisation, many companies are shifting their attention towards services; they are increasingly utilising services, amending their products to become a hybrid offering, or even transforming their products into services.
For example, Deutsche Bahn successfully offers the Call-a-Bike or Flinkster sharing schemes – services that extend Deutsche Bahn’s portfolio as a mobility provider. Another example is provided by Audi, a traditional car manufacturer that intends to transform tangible products into services. CEO Rupert Stadler said in an interview with Auto Motor und Sport: ‘Imagine, each of our models will have a seat that contains all of today’s available functionalities, which are cooling, heating, massage and individual adjustability. our customers could enable features on demand for a certain period of time and pay only for the service.’[1]
The transition from a product to a service company must be undertaken carefully. The ideal service is easy to use, set up and maintain. But this is not always possible. Picking up from the previous example – it is a considerable risk for Audi to build all its cars with every high-class functionality, using expensive hardware,[2] if the buyers do not then make sufficient use of these add-on functionalities. It is therefore paramount to carefully balance old and new elements of the business portfolio to mitigate such risks.
Furthermore, it might be necessary to think two steps ahead and consider holistic customer experiences in respective ecosystems. In the case of Audi, a service approach based on hardware functionalities might not be sufficient. Audi still has to build and create the fully equipped car without the certainty that buyers are using the add-on services. Market research is mandatory in any case, but ultimately the services in the car cannot be relocated to another car. The risk of having unused services can only be mitigated if the car were not restricted to an individual owner and the car itself were a service to be used by several consumers, each with a different usage preference.
There are services that do not contribute directly to a company’s ROI (return on investment) (at least in the traditional sense), but still give value to its consumers.
These open doors into broader ecosystems where different services bring additional value when they are used collaboratively.
From a service company’s point of view, it is essential that the overall usage of a service ecosystem has a positive ROI. In addition, it is desirable to ‘lock’ the end consumer into a vendor ecosystem. According to Osterwalder and Pigneur,[3] this is where Apple provides an example of best practice: after Apple released the iPod in 2001, the company started to create its ecosystem by combining iPod devices with its iTunes software and iTunes online store to the exclusion of other service providers. The value Apple promised with this offer was the ease with which customers could search, find, pay, access and enjoy their digital music. Based on this experience, Apple enhanced and developed its portfolio. With the iPhone, it created an even more exclusive ecosystem. Apple’s app store is the perfect platform to sell third-party (albeit pre-approved) software. On the one hand, third-party apps complement Apple’s service offerings and improve the user experience. However, on the other hand each vendor must pay licence fees,[4] meaning that Apple is earning money both from its suppliers and customers. The business model is highly scalable – i.e., Apple can attract an unbounded number of app developers who share a great part of the risk and investment.
In the end, companies like Apple bind the customer more tightly by offering a perfectly self-complementing ecosystem of services. The key enabler for such a tailored offering is the data of the customer who is willingly sharing his personal information to achieve a much better user experience within the service ecosystem.
Providing and consuming services can be considered at different levels. Most obviously, companies provide services to end customers. However, service thinking goes further; for example, supply chains allow companies to use services from other companies. Even within a company, one department can use services that are provided by another department. Such hierarchies of consumers and providers follow the paradigm of service orientation.[5] This is not a new concept. The IT community, for example, has discussed SOA (service-oriented architecture) for many years.[6]
The modernisation of business through digitalisation ultimately requires a reconsideration of traditional business models.
A major aspect of digitalisation is minimising the enterprise’s tangible assets, which is a shift in the expenditure strategy from CAPEX (capital expenditure) to OPEX (operational expenditure).[7] Consequently, many companies are diminishing their expensive assets (e.g., data centres, real estate portfolio) and themselves using services from other companies that have made the respective service a core competency.[8] For example, Amazon offers a highly mature IT infrastructure on demand with the Enterprise Cloud from Amazon Web Services,[9] making it unnecessary for most companies to invest in expensive IT infrastructure in their own data centres.
Not surprisingly, service thinking also leads to new forms of organisation. Service-oriented enterprises are structured in units corresponding to their various internal and external service offerings, and so are their IT systems and data ownership. Loose coupling, reuse and composability of services increase the need for operational efficiency and flexibility.
Services lower the barriers to reaching new customers (and new markets), deepen the relationship with clients and reduce the required capital (CAPEX).
Thinking in terms of offering services increases the scalability and flexibility of business models, which supports companies in the creation of tailored ecosystems and from there the achievement of competitive advantage.
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[1] Dralle, J., Alex, R.: ‘Audi-Chef Rupert Stadler im Interview – Kunde bezahlt nach Bedarf’, Auto Motor und Sport Online, 2016.
[2] Rehberg, J.: ‘Audi: Digitale Dienste sollen Hälfte des Umsatzes ausmachen’, kfz-betrieb, 2016.
[3] Osterwalder, A., Pigneur, Y.: ‘Business Model Generation: ein Handbuch für Visionäre, Spielveränderer und Herausforderer’, Campus Verlag, p. 51, 2011.
[4] Apple Inc.: ‘iTunes Legal Terms’, Apple Inc., 2016.
[5] Allen, P.: ‘Service Orientation: Winning Strategies and Best Practices’, Cambridge University Press, 2006.
[6] Bieberstein, N., Laird, R. G., Jones, K., Mitra, T.: ‘Executing SOA – A practical guide for the service-oriented architect’, IBM Press, 2008.
[7] Maverick, J. B.: ‘What is the difference between CAPEX and OPEX’, Investopedia, 2016.
[8] Allen: p. 3.
[9] Amazon: ‘Amazon Web Services’, Amazon.com, Inc., 2016.
