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LEAD Innovation Blog

Read our latest articles on innovation management and innovation in a wide range of industries.

Date: 14-Jun-2019
Posted by: Franz Emprechtinger

Can Servitization heal the sick hospitals?

 

Hospitals also have to struggle with a shortage of skilled workers, rarely make a profit and have to master digitalisation through innovations in order to remain fit for the future. Many see closer cooperation with medical technology companies as a possible way out of this dilemma. They are trying to bind hospitals to themselves through servitization.

According to a regular survey conducted by Roland Berger, there can be no talk of healthy development in German hospitals. According to the study, almost one-third of hospitals were unable to break even in 2017. In any case, the respondents (board members and managing directors of the 500 largest German hospitals) did not see any improvement in the economic situation. However, they still have to invest: Many of the hospitals have an outdated IT infrastructure that urgently needs modernization. The digitalization of hospitals and necessary innovations, however, require additional funds. In addition to the persistently high need for investment, hospitals also cite the shortage of skilled workers as a further major challenge. And: Patients today have more medical knowledge. They have become more critical and thus also more difficult customers for hospitals.

Many hospitals see cooperation with medical technology companies as an alternative to making operations more efficient through innovations. The hospital managers surveyed see these companies as providers of ideas and hope that they will be able to drive innovation forward. 70 percent of the respondents stated that they already cooperate with such companies. They hope that this will lead to an improvement in the quality of treatment and an increase in internal efficiency. The respondents also cited the possibility of outsourcing areas as a reason for cooperating with medical technology companies. Cooperation is understood to be a contractually regulated cooperation that goes beyond a pure customer-supplier relationship.

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Servitization offers producers new opportunities

These statements reflect a desire that is not only growing in this niche, but more and more in the entire B2B and consumer market: Customers - in this case hospitals - are focusing more and more on the benefits of a product or system. Ownership is becoming less and less important. This trend has produced many business model innovations: With pay-per-use contracts, the user pays a usage-related fee and no purchase price. In the sharing economy, the focus is also on using, not owning. If a supplier offers its customers additional services around its products that optimize usage, this is referred to as servitization. A material product is replaced by a Product Service System (PSS). A popular example of such a business model innovation is Rolls Royce's "Power by the Hour" model. The engine manufacturer makes its products plus spare parts available to the aircraft manufacturer for a price per flight hour instead of selling them to them. Rolls Royce remains the owner of the engine throughout its lifetime and is also responsible for monitoring, maintenance and repair. In a nutshell: Instead of engines, Rolls Royce sells the "flying" service.

 

Both manufacturers and users benefit

This model has some advantages for the manufacturer:

  • Its services can set it apart from its competitors who manufacture similar products, thereby escaping a fierce price war.
  • Customer relationships and loyalty are becoming more intensive.
  • The additional services open up new sources of revenue. Servitization also smoothes the manufacturer's revenue curves by generating recurring revenue instead of just selling a product.

 

The list of benefits Servitization offers customers is even longer:

  • Both manufacturers and users have the same goals. While in traditional purchasing, the supplier earns a share of each repair, he is now interested in ensuring that the product or system functions as flawlessly as possible. Servitization could therefore counteract the phenomenon of planned obsolescence and encourage the production of more durable products.
  • Servitization converts high investment costs for new devices, which are then depreciated over years, into variable operating costs.
  • The manufacturer is responsible for the operation of the device during its service life. The risk of failure for the customer is therefore more or less reduced to zero.
  • Since the user no longer has to worry about the smooth operation of a system or device, he can concentrate better on his core competencies.

 

GE Healthcare focuses on service and consulting

Some of the hospital problems listed in Roland Berger's 2018 study could be alleviated or even solved by servitization. Since medical technology is a very competitive market, manufacturers are also involved in servitization. In addition, extended product-related services can also open doors for the introduction of innovative technologies in markets where customers have low investment budgets. GE Healthcare has been engaged in servitization since 2000. The manufacturer of complex medical equipment such as MRI devices, for example, not only offers remote monitoring and maintenance of its own products, but also those of other manufacturers. GE Healthcare also offers consulting services for the planning and budgeting of entire hospitals.

 

Digitization offers Servitization undreamt-of possibilities

Digitalisation makes it much easier to offer complementary services to the products. Technology therefore plays a key role in servitization. A report by the Cambridge Service Alliance, for which major equipment manufacturers on the one hand and scientists on the other, were surveyed, lists which exactly. The technologies that both groups believe will have the greatest impact on servitization are the following:

1) Data analysis that can reveal causalities and patterns and make statements about the future (big data, predictive analytics, case-based closing). Monitoring consumption plays a key role here. This makes it possible to generate consumption-oriented supply chains that are individually tailored to the customer.

2) Networking for remote maintenance and monitoring.

3) Dashboard technologies to present KPIs clearly and to make services more tangible.

4) GPS for locating and tracking machines, products, spare parts and employees.

5) Mobile devices to retrieve information or control IT systems from anywhere.

 

Conclusion: Can Servitization heal the sick hospitals?

Hospitals are forced to perform more and more as resources become scarcer. This can only be achieved through innovation. Many hospitals are unable to finance these on their own. Hospitals hope to find a way out of this dilemma by cooperating with medical technology companies. Servitization gives hospitals access to innovations and allows them to focus more on their core business and patients. The equipment manufacturers again benefit from close customer loyalty and additional revenue sources and can thus avoid a ruinous price war.

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Franz Emprechtinger

Born in Ried im Innkreis. As Head of Innovation, he is responsible for the entire project management and specializes in the areas of fuzzy front end and business model innovation.

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