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ADDING VALUE THROUGH INDUSTRIAL SERVICES - A CASE

STUDY OF REMOTE CONDITION MONITORING

Richard Windischhofer1

, Natalia Reen2, Kim Wikström

3, Magnus Gustafsson

3, Magnus Hindström

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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 2 Åbo Akademi University, PBI Research Institute

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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.

Figure 3 Identifying the service concept and business model needed

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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 business-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

18

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.

Figure 5 Model for matching provider’s and customer’s business models to the service concept

19

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.

20

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.

21

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

22

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

23

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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