What does industry expect from its digital service providers?

Large industrial companies invest in digitalization and its key areas (Parkkila 2020). Digitalization is seen as a source of future competitiveness for new value creation and revenue generated opportunities (Kamalaldin, Linde, Sjödin & Parida 2020). The development of digitalization and increased global competition have led many manufacturers to look for new solutions for their customers’ needs (Martin-Pena, Sanchez-Lopez & Diaz-Garrido 2020).

“Industrial customers are increasingly focusing on buying digitally-enabled advanced services, i.e. integrated solutions that combine products and service functions with digital capabilities”. (Kamalaldin, Sjödin & Parida 2018). Digitalization and servitization seem to have a positive impact on the company's performance, and their development creates new opportunities for the production of turnover and new services (Martin-Pena et al. 2020).

Many companies are struggling with digital transformation because changes are needed in provider-customer relationships to adopt new innovative approaches. Digitalization combined with servitization essentially changes the service provider-customer relationship. It is important to understand the mutual requirements of the partnership as it requires a close interaction between the customer and procurement organization and the operational functions. (Kamalaldin et al., 2020)

This blog introduces what large industrial companies expect from their digital service providers, what characteristics and requirements small and medium enterprises (SME) and micro-enterprises should have. This gives some advice on how they can best meet the needs of large industrial companies as providers of digital service solutions.

Altogether thirteen process industry companies’ representatives from Northern Finland and Sweden were interviewed in the DigiProcess project during spring 2020. This multiple case study aimed to get answers to the following questions: Which characteristics are important for being a digital service provider? What are the key purchase requirements for digital service SMEs and micro-enterprises?

Acquisition of digital service solutions is based on the need

Based on the interviews, the procurement of digital service solutions is based on the need and the fact that the solution provides added value and fits the strategy of a large industrial company. On a case-by-case basis, the need for a whole is considered and the most suitable solution for the company is selected.

Acquisition is often a resource issue for a large company, so it’s not worth doing everything yourself. Large companies want to focus on key competencies. Knowledge is acquired through suppliers, but the acquisition must not consume too much of the limited resources of large company employees. The goal is to build long-term service provider-customer partnerships on a win-win basis.

Characteristics of digital service providers

Readiness for change and communication management

This section summarizes the results of the interviews on the characteristics that SMEs and micro-enterprises should find as a provider of a digital service solution (Figure 1). In the piloting and experimental phase, the most significant characteristics are 1) the ability to develop agile, but also 2) the ability to react quickly to changes. In large companies has been observed that as the size of a company increases the speed of operations may not increase. In service provider-customer relationships 3) communication should be transparent and open in order to be able to act agilely. Supplier companies must operate openly that the supplier does not, for example, encrypt a database or some other solution.

High technological know-how and industry understanding

Large companies expect that SMEs and micro-enterprises should have 4) high technological know-how and a high technological understanding. They have services and solutions which are not available from large supplier companies. According to the interviews, small companies have better innovation preparedness compared to larger supplier companies.

It is also important for suppliers of digital service solutions to have 5) an understanding of industry, knowledge of the industrial operating environment and an understanding of the production process for which the service solution is provided. Due to the knowledge of the operating environment, the company is more reliable, co-operation is better and things can be taken forward more easily. It is hoped that SMEs and micro-enterprises will be ready for industry-specific solutions or modifications.

Large companies’ representatives wish that service provider companies should have 6) the ability to productize their ideas. According to one interviewee: “Startups and SMEs are good with piloting, but there are problems with productization. I see it quite problematic for the growth of these companies.” If necessary, small companies must be able to expand and 7) scale their digital service solutions to several production lines, factories, and even globally. According to the interviews, SMEs and micro-enterprises are good for quick experiments and piloting, but scaling does not work. Scaling a productized solution to multiple production lines is often difficult and also risky for micro-enterprises. When delivering globally, suppliers and service providers must also have 8) language skills to be able to support production workers in different languages.

Reliable partner

Providers of digital service solutions must be prepared to be able to 9) deliver what is promised. In addition, they must be 10) reliable so that the information on the customer relationship of the service provider does not spread outside the cooperation relationship, for example to competing companies. Even small businesses may feel that a large company is a threat to them. The challenge is the fear of copying their technology and rejecting it. Large companies want longer-term partnerships with SMEs and want them to be a strategic partner. Finding common goals is important.

Large industry companies hope that SME and micro-enterprise providers of digital service solutions would be able to be 11) a reliable longer-term partner. Large companies want to ensure continuity of cooperation and long-term operations. Partnership is valued, as it is always needed in some form. Partnerships are agreed upon and should be able to be developed further. However, changes can take place, for example, through acquisitions. A small company can merge into a larger supplier company and still, the collaboration can work. Building sustainable contractual relationships and partnerships are important. The goal is to build a mutual win-win situation where both parties benefit.

SMEs and micro-enterprises should have 12) continuity in business operations and service development. It would ensure the support and development of digital service solutions for customer companies in the future. The main requirements for large companies are that certain activities should be supported even after the acquisition and around the clock.

Figure 1. Key characteristics of digital service providers (Peetu Virkkala, MicroENTRE)

Key sourcing requirements for digital service providers

This section guides the requirements that are expected from SMEs and micro-enterprises to form a service provider-customer relationship with large process industry companies. The analysis of the large industry company interviews provided answers to the minimum procurement and purchase requirements for digital service solution providers for SMEs and micro-enterprises.

Large companies have their procurement policy and 1) procurement proceeds following the procurement and delivery conditions related to general procurement and legal requirements that must be met. SMEs or micro-enterprises providing service solutions should have 2) operational and delivery reliability. They must have the ability to deliver. Operational and delivery security is affected by the human and financial resources of micros and SMEs. The service provider's background must be strong enough and operate on a sustainable basis so that the company will continue to operate in the future. The viability of supplier companies is carefully considered to minimize supplier risk.

It has been found that risk sharing is more difficult between small companies. Indeed, one large company suggests that SMEs or micro-enterprises should network with each other to be able to supply larger entities and thus be able to improve the reliability of delivery. Another option is to partner with a large supplier company. In addition, an alternative is, for example, Finnish-Swedish co-operation, where Finnish and Swedish SMEs and micro-enterprises could together offer solutions to meet the needs of large companies. However, this requires an appropriate business model in which the rules of the game are agreed upon between the companies.

In connection with procurement decisions, the 3) customer references of supplier companies are often checked to reassure the successes of deliveries of service solutions. When making purchasing decisions, 4) the agility, flexibility, and speed of small businesses become key positions. Most often, these characteristics are found in SMEs and micro-enterprises. They are flexible and can adapt quickly and provide their expertise to the customer. 5) Price also becomes an important issue, but it depends on what stage we are at, because “the more mature we go, the more important is the price and the ability to make further development.”

Conclusion

This blog reviews the results of large company interviews in Finland and Sweden. Efforts have been made to find out what kind of characteristics and requirements are expected from SMEs and micro-enterprises as a provider of digital service solutions from the perspective of large industrial companies. The interview results show several enabling factors for service provider-customer cooperation that SMEs and micro-enterprises should consider. The results of the interviews show similarities in both countries. This will allow cross-border cooperation between large industrial companies and SMEs and micro-enterprises.

In digital service offerings, large companies have a need and they want to find the most suitable solution for an entity. Depending on the stage (experimental phase, pilot phase, productization phase, production phase, global scaling), the right competencies and flexibility must be found. There must be resources, operational reliability, the ability to deliver, and also reliability of delivery.

Large companies need a reliable partner in the longer term when integrating a service solution into production. For this reason, the viability of a small business is looked at more closely. It is also often considered whether the solution could be scaled to more production lines and globally. In addition, it is important to have support even after the acquisition of a product or service. Large companies wish to build and develop long-term and reliable partnerships in the provider-customer relationship so that a mutual win-win situation is achieved. In addition to technology, digital service offerings need to consider resources and organizational change management in the transition from the pilot phase to the productization phase and from there to the production and finally to the scaling phase.

Main contact and inquiries:

Leena Parkkila, Project Engineer, Lapland University of Applied Sciences, leena.parkkila@lapinamk.fi

References

Kamalaldin, A., Sjödin, D. & Parida, V. 2018. Understanding Procurement Processes for Digitally Enabled Advanced Services. Book of Abstracts: 7th International Conference on Business Servitization / [ed] Emanuel Gomes, Miguel Pina e Cunha, Ferran Vendrell-Herrero. Omnia Science. 2018, pp. 118-124. Viitattu 4.8.2021 http://www.diva-portal.org/smash/record.jsf?pid=diva2%3A1276095&dswid=-2980

Kamalaldin, A., Linde, L., Sjödin, D. & Parida, V. 2020. Transforming provider-customer relationships in digital servitization: A relational view on digitalization. Industrial Marketing Management, Vol. 89, pp. 306-325. Viitattu 4.8.2021 https://doi.org/10.1016/j.indmarman.2020.02.004.

Martin-Pena, M.-L., Sanchez-Lopez J.-M. & Diaz-Garrido, E. 2020. Servitization and digitalization in manufacturing: the influence on firm performance. Journal of Business & Industrial Marketing, Vol. 35 No.3, pp. 564-574. Viitattu 4.8.2021 https://doi.org/10.1108/JBIM-12-2018-0400.

Parkkila, L. 2020. Suurteollisuuden digitalisaation avainalueet ja mahdollisuudet pk- ja mikroyrityksille. Pohjoisen tekijät blogi 8.12.2020. Viitattu 3.8.2021 https://www.lapinamk.fi/blogs/Suurteollisuuden-digitalisaation-avainalueet-ja-mahdollisuudet-pk--ja-mikroyrityksille-/elbc0y4s/4a8756a8-bf46-4f75-a2b3-bc438d6350db