The associated with the development of the

The service sector is a
vital part of manufacturing firms; it provides services and solutions that
complement their initial product offerings. In modernised businesses, the
service sector is growing rapidly and being relied upon by businesses and
consumers. In India, the service sector has grown rapidly, causing an increase
of 55% of India’s GDP in 2006-2007 (Business Maps of India, 2010). By
introducing servitization and modern business practices, businesses are able to
explore areas of endeavour outside of their original market, providing service to
a wider customer base to maximise profits. However, there are several
challenges associated with the development of the service sector that
management accounting come across, challenges may include relationship
disturbance between established business disciplines, control issues and
measurement issues.


International Business
Machines is a US multinational technology that embraced servitization and as a
result went from a near failing hardware business to a successful solutions
company. By servitizing, firms are able to satisfy customer needs by becoming
an integral part of the customer’s purchase decision. Firms are also able to
amplify performance, provide continuous revenue and obtain higher profit
margins (Brady and Hobday, 2007). In relation to IBM, in order to survive in
developed economies, firms are unable to remain purely manufacturing firms,
instead they have to offer services and solutions delivered through their
products, thus inheriting cultural and corporate challenges. (Baines et al,
2007) describes this as a shift from “product thinking” to “systems thinking”. Furthermore,
servitization results to a development in paradigms in the management of
manufacturing, product and services. For example, the design of services is
different to the design in products, therefore companies need to acknowledge
the new activities that were previously undertaken by customers (Slack, 2005).
With this comes the difficulty of implementing the changes into an organisation,
(Neely, 2009) categorises these challenges as mind set based, timescale based
and business model based. All in all, the service culture is different from
traditional manufacturing culture, and the company needs to become more
customer centric in order to be successful in change.

Previously there was a clear dichotomy between
service and product, which has now been reinstated by a service-product
continuum. (S.G. Kerr, 2009) believes that the new discipline will creatively
disturb the dichotomy relationship between more established business
disciplines. Systems and procedures are viewed through an ‘accounting lens’ not
a ‘management lens’, which may not be favourable towards the implementation of
the service sector. (Eldenburg & Wolcott, 2005) (Garrison, Noreen, &
Brewer, 2008) go further and describe areas of accounting practice that
challenge the principles and practices of the paradigm of manufacturing. They
discover that customer dissatisfaction from service science is not included in
financial reporting, finding a lack of recourses that could be needed to ensure
the financial reporting is faithfully represented. Also, accountants often
struggle to provide costs information about services, they often use normal
costing in a manufacturing situation which is not consistent with the idea of
coproducing value with a client. As a result, unless the servitization process
is designed and implemented correctly, the results can be counterproductive and
even damaging to the business and its customer base.

Furthermore, (S. Modell,1995) argued that many
accountants offered little utility to managers in planning and controlling
service operations, and management accounting text books played limited
attention to services as they were mainly concerned with control and allocation
service costs. Similarly, to (S.G. Kerr), (S. Modell) observed that although
the two functions are interlinked, sometimes they are inadequately
distinguished from each other. An understanding of the costs of satisfaction in
servitization is less developed than it is for pure manufacturing industries;
services are intangible and in contrast to goods, have no physical entity to
whose satisfaction production can directly be linked to generated costs (Caru
& Cudini, 1999). This ultimately causes; measurement issues from cost
allocation techniques being based on inventory valuation without regarding
servitization factors; and control issues that concern with the uncertainty
associated with predicting and evaluating servitization.

The issue of satisfaction costs is particularly
relevant in tourism and holiday resorts. (Harris & Mongiello, 2006)
describes this industry as a multifaceted service, by applying a framework
correctly, the common challenges can be avoided. Identifying the activities of
the production process enables an allocation of costs and assessing
satisfaction and its costs allows for a more efficient prediction and
evaluation for manufacturing accounting principles and practices.

To conclude, businesses are adopting a ‘solutions’
model that offers customised solutions to clients, where manufacturing is not
able to differentiate in the process. From this, it is being discovered that
servitisation holds stable revenue streams and provides competitive advantages,
the survival strategy and lifeline and basis for growth to compete in the
global market. Whilst servitization is an attractive option for manufacturing
companies, it also raises significant challenges or risks when not addressed
adequately, and therefore the paradox that the financial rewards of
servitization are not certain. It can be argued that the service sector is
still in its infancy and developing, therefore service science could improve
the state of accounting research into the service sector. However, these
findings could be seen as outdated, the service sector is growing rapidly and
the economy is becoming more advanced in modern day business and therefore the
challenges that manufacturing accounting refer to in principles and practices
may no longer be the case.