The extensive digitalization and interconnectivity of products and services, has transformed the industrial landscape. In this context, data-driven business models, such as smart Product-Service Systems (smart PSS), have emerged as key enablers of value creation and data-based offerings throughout the product’s lifecycle. Despite these opportunities, the development and integration of smart PSS remain a challenge for enterprises. This paper addresses the gap between academic research and industrial practices through an explorative study of German SMEs, aiming to map and analyze their current development practices. Our research focuses on identifying challenges, opportunities for improvement, and necessary changes within existing processes towards smart PSS development. The study consists of expert workshops, which were conducted in 5 companies with a total of 22 experts from relevant domains. The findings reveal that development practices in these enterprises are predominantly informal and shaped by legacy systems, which, while adaptable, hinder the full realization of smart PSS potential. Our study highlights the critical need for enterprises to adopt a more systematic approach to development processes. By effectively integrating product and service development with data-centric tools and methodologies. Additionally, the research provides actionable insights for practitioners to expand and enhance existing competencies towards successful smart PSS development.