Servitization and financial challenges of SMEs

The impact of services has increased during the 20th century in many fields of industries. Many large industrial companies, which earlier provided services around their products, now produce products as parts of services produced in multiform value chains. Also SMEs have adopted similar servitization business models bit by bit. However, do SMEs have similar possibilities to servitizate their business? Let’s look at the topic from an SME’s point of view.

A firm producing advanced services is committed to deep customer cooperation and delivers added value of high standard through a joint development operation. In servitization, a customer buys competence, results, solutions, or a standard of service.  The customer pays, in turn, per consumption without ownership or other financial investments of the devices. Nevertheless, if the supplier is an SME, does it have financial possibilities to invest money into such an operation? Initial interview results among Finnish SMEs as part of the ProcessSME Project indicate that financial issues occupy entrepreneurs’ minds. SMEs are used to bill based on working hours, which, in turn, is based on clients’ orders. The clients own the devices, which puts a strain on the clients’ balance sheets. If an SME decides to servitizate its operation, and serve its clients largely, the investments put a strain on its own balance sheet. In some cases, the financial burden might be too risky for a small firm.

In my opinion, financial matters are too often neglected and benefits are highlighted in practical servitization discussions. The benefits of servitization include long agreements reducing daily competition, a sustainable cash flow, and a buffer against temporary changes of the field, for example. Additionally, sustainable partnership with the client opens new business possibilities enabling to increase revenue in the long run. However, together with servitization benefits there is a need to consider possible financial challenges and to be prepared to meet them as well. Servitization, as a whole, is spreading out at a high speed. Particularly for SMEs, it means thorough financial calculation exercises.

Kyllikki Taipale-Erävala

Post-Doctoral Reseracher, University of Oulu, +358 50 576 5764

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