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October 14, 2016updated 21 Jan 2021 2:01pm

Transforming manufacturers’ business models through ‘Servitisation’ – a new opportunity for management accountants

By Peter Simons

Management accountants have an important role to play in helping manufacturers transform their business models from providing a product-based value proposition to more of a service-based offering. This has major advantages: a more constant revenue stream than sales transactions alone, improved customer experience, and higher competitiveness.  This already well-established shift is known as “Servitisation”.

The clients of Rolls Royce, for example, no longer buy aerospace engines. They instead pay for flying hours while Rolls Royce takes care of service and support. Likewise, General Electric (GE) sells gas turbines but also offers services such as repairs, maintenance, performance and software upgrades.

These changes were driven by advances in technology and data analysis used to inform innovation and enhance the services provided to customers. Selling these services can be more rewarding for manufacturers than the hardware itself as customers become members of the manufacturer’s digital ecosystem. For Rolls-Royce, analysis of data from engines was long used to prevent problems or to suggest improvements and now helps advising customers.

Accountants should be aware of the servitisation trend and its potential impact on companies. Looking at the manufacturing sector, what potential role can management accountants play and how can they help businesses? We sponsored a report by Andrea Tenucci, Assistant Professor at the Institute of Management – Scuola Superiore Sant’Anna in Pisa, who looked into “The Role of Management Accounting in Servitisation”.

The research highlighted that less accounting information is available for services than for products which means businesses need to pay close attention to understanding and assessing the value of the services they are offering. To do this, they need to ensure they apply accounting and control techniques to these services which is all too often not the case. Thus, companies that work in servitisation should rethink their accounting objects and their control devices. When it comes to pricing, service costs are often included in the product price although they are not calculated and therein lies the danger. This pattern can result in overpriced products or inferior services and endanger competitiveness and lead to missed opportunities in the long-term.

There is significant potential for management accountants to have an impact in the services domain. By providing facts and figures related to service business opportunities they can improve the servitisation process. So far, prices for services have very often been decided by company salespeople. However, services and their set monetary values should be incorporated into the company business plan. When it comes to the manufacturing sector, profit should not only come from the sales of machinery and machine parts. Instead, profits should be linked to the lifecycle performance of the machinery which would then change the thinking of the revenue, cost and profit centres of businesses.

Management accountants are well placed to guide changes in servitisation and develop new analysis tools, cost, revenue and project objects, and pricing methods or improve existing ones. This will help meet the growing servitisation requirements of companies and help with further progress. Management accountants can play a vital role in translating the complexities of servitisation to support the work required for long-term success.

Peter Simons, technical specialist, research and development, CIMA

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