Servitization in construction

by   |    |   3 minutes  |  in Construction and Contracting, Digital Transformation, Strategy   |  tagged , , , , ,

Get your business strategy in place to maximize the profit potential of the servitization trend.

Servitization is becoming a major trend in product-centric industries where suppliers of products are now moving from simply supplying products to providing services. You see this trend in many industries. Hire and rental contracts are increasing, as are ”power by the hour” contracts in the aircraft industry, the cloud is becoming the new norm in delivering IT solutions as a service and with software as a service (SaaS) / rental pricing models are rapidly becoming the new normal.

Most people don’t buy cars anymore. We look at a car as a service with a monthly cost and when autonomous driverless cars become reality soon, we will simply pay for a service like we do with taxis. So is this servitization concept that’s used in product-centric businesses not appropriate for construction?

The construction industry builds large complex assets, so is this trend going to change the industry?

The answer is yes. So if we don’t adapt our business strategy, we are not going to be in a position to take advantage of this new world.

What we have seen in other industries is that the trend starts slowly and many cynical people think it is just a passing fad. Then, it suddenly gathers pace and becomes the new norm very quickly. I expect the same will happen in the construction industry.

Expect to see unexpected. New companies enter the market with new innovative ways of working, perhaps even companies like Amazon or Google.

Increasingly, asset owners are looking to outsource the services required to maintain their assets over their lifecycles. Service or facilities management contracts are often offered by construction companies for assets they have built or for assets that some other contractor has built. These service-based commercial contracts have evolved over time, typically based on, for example, asset availability or response times. There is a trend toward “contracting for outcomes” with the construction firms that build these. These performance-based contracts are changing the business models that construction firms use to approach the market.

When talking about buildings, the term ”facilities management” is generally what is used today. The contract is about making the facility available. A five- to ten-year contract is typically awarded to a construction company to build and maintain the asset. As part of the contract, they may also have scope to rebuild, refurbish or build new assets. It’s about services as much as construction per se; so it is very much the same thing as servitization in the manufacturing sector.

One other big driver that will help to accelerate this trend is how companies are valued. Traditional construction companies who depend on large, lumpy capital projects will have lower valuations than companies with long-term steady service-based contracts with a predictable order book.

Are you ready for what’s next?

To summarize, we need to have a strategy in place to maximize the profit potential of the servitization trend. For most companies that will mean changing most things in the business – the skills, culture, processes and business systems. Are you ready?

For more information on servitization and how to prepare your organization for what’s next, read my white paper, “Servitization: How it is changing the construction industry.”


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