Manufacturers can guard revenue by expanding service offerings.
by Sasha Banks, February 2011
In today’s increasingly volatile and fiercely competitive global market, manufactured products are fast becoming commoditized. In light of low-priced competition from emerging markets such as India and China, executives at discrete manufacturing companies—making everything from computers and appliances to heavy equipment and airplanes—are struggling to differentiate their products. In addition, economic uncertainty in the established markets of the U.S. and Western Europe has caused companies to delay purchases of new capital equipment, drastically reducing product revenues.
In response, manufacturing companies are turning to services and bundled service-with-product solutions as ways to augment revenues, grow profits, and differentiate brands. However, many challenges exist in delivering services that help maximize financial performance and customer value.
Brave New World
The concept of “service” used to be viewed as a liability for manufacturers, who regarded it simply as a function for keeping customers up and running. Now, value-added services and bundled service-with-product solutions can become a recurring revenue stream. New, more-complex service models are also emerging, and manufacturers are looking to provide services beyond the products they produce to include complementary and competitive products. Some of these new services include extended warranties and performance-based contracts, which guarantee maintenance and uptime for a fixed fee. Also included are built-in upgrades, online customer service, and spare parts. Along with providing extra revenue, these types of services create customer satisfaction and loyalty.
According to a recent report from the Aberdeen Group entitled State of Service Management 2011: Achieving Connectivity and Growing Revenue, chief service officers (CSOs) are struggling with developing their service businesses and transforming service into a core business profit center. In the study, 61 percent of the 250 organizations polled indicated they were operating their service businesses as profit centers with financial and operational goals in place, and 18 percent were looking to transition to a profit center in the next 12 to 24 months.
Those companies managing service as a profit center have had much more success in controlling service-related costs.
Given revenue creation struggles, it isn’t surprising that the survey found that CSOs considered the growth of revenue from service to be their top goal for 2011. These service leaders are building businesses that aren’t just looking to retain or satisfy their customers, but are actively seeking to maximize the share of wallet that they are capturing from their customers, whether in the form of renewed service contracts or the purchase of complementary value-added services.
“Having achieved excellence in service management from a customer-facing, operational, and financial perspective, best-in-class organizations have an eye toward the next step of service-led differentiation,” says Sumair Dutta, senior research analyst at the Aberdeen Group. “While efficiencies can still be driven within the organization, growth in service will happen on the revenue side of the equation. For this to occur, Aberdeen’s data indicates the ushering in of the era of the fully connected service enterprise—one where service isn’t just a standalone function but a value driver that is at the core of the entire organization.”
Path to Service
Regardless of where they are in their service transformation journey, manufacturing leaders can take some critical steps to build a successful, competitive service operation. They must keep in mind the impediments that can thwart the success of a service transformation. Overly complex service models, disjointed silos of information, and product-centric technology infrastructures can prevent accurate analyses of information necessary to design profitable service solutions. Moreover, the shift from product to service centricity has become the Achilles’ heel of the manufacturing enterprise, because a service-centric operation is rife with unpredictable, reactive service processes; the unpredictable availability of parts and technicians; and customer dissatisfaction.
“Most manufacturing organizations struggle with the development, marketing, and support of new services due to the poor collaboration between service and other key business functions,” says Dutta. “While 90-plus percent of manufacturers believe that it is imperative for service to be tightly integrated with other business functions, only a few leading organizations have actually taken the steps to share and connect service-related processes, workflows, information, and systems with respective sales and marketing organizations.”
Some manufacturers will have highly automated service management capabilities in some areas, while in other areas they may not possess any process definition whatsoever. The level of service performance is not as important as having the ability to clearly identify the gaps, map out a set of objectives, chart a course of action, and monitor performance throughout the service transformation lifecycle. Here are six steps for organizations implementing a service transformation solution.
Integrate services into the development process. Manufacturers are looking to augment revenues by bundling products and services to create complete customer solutions. They must also manage the portfolio of solutions across channels and partners to maximize revenue and profit. Are the most-profitable customer segments well defined? Is there the capability to manage complex pricing terms and discounts across multiple contract types? For manufacturers to be able to do this, they must have integration between product development, sales, manufacturing, installation, and service/maintenance. This integration allows sales teams to identify profitable service offerings and gives field service personnel the ability to cross-sell and up-sell.
Drive revenue through the market-to-revenue lifecycle. Sales teams need the tools and training to deliver these new solutions to the customer. Manufacturers are scaling pay-per-use services, performance-based service contracts, and other measurable, premium-price support services. While robust contract management processes are critical to effectively administer services, inability to access or assess entitlement information in a timely manner can cause delays in identifying resolution options, scheduling field technicians, identifying depot repair lead times, or committing to resolution dates. Limited access to time-sensitive information can also undermine a manufacturer’s ability to bill in a timely and accurate manner, complete entitlement verifications, and deliver superior service. With real-time visibility into equipment usage and service-level-agreement performance, manufacturers can optimize revenue accruals, labor utilization, and profitability throughout the entire service lifecycle.
Optimize solution planning. As new and more-complex solutions are developed and sold, planning the delivery and ongoing support of these offerings becomes increasingly critical to the success of the transformation. Companies need project management and resource planning capabilities to ensure timely and cost-effective delivery. Planning of sometimes-costly service and replacement parts for new, more-complex solutions also needs to be coordinated to ensure optimal product performance. In addition, real-time monitoring of key solution-operating metrics provides the ability to predict failures before they occur, enabling proactive service and improved solution performance.
Differentiate solution delivery. Today’s most-successful manufacturers are differentiating their brands, boosting their revenues, and satisfying their customers by bringing exceptional equipment installation, maintenance, parts delivery, and repair services to market. By implementing consistent service management processes and developing an integrated systems infrastructure, service executives can effectively manage service operations and differentiate delivery capabilities. This provides added value to customers, generating more recurring revenue, higher satisfaction, customer loyalty, and even cost savings by avoiding inefficiencies and redundant efforts.
Develop an adaptable solution foundation. Usage-based services present new paradigms in managing service operations for manufacturing companies. With execution focused on maximizing asset availability, manufacturers are changing the way they deliver installation, maintenance, warranty, parts shipping, reverse logistics, in-house repair services, and finance offerings. Companies must be able to track and optimize service inventory and spare parts stock across the entire services value chain. Orchestrating these closed-loop activities across a multiple-service value chain requires an integration architecture that automates, monitors, coordinates, and optimizes service operations.
Measure service performance for continuous improvement. For manufacturers to continuously improve the performance of their service operations, it is essential for them to implement a scalable business intelligence (BI) foundation using powerful BI tools that support best-practice applications for financial and operational analytics. BI tools will illuminate patterns about how the service was marketed, utilized, and received by the customer. Is the service being delivered profitably and cost effectively? Which service bundles go with which market segments? Did the service generate up-sell and cross-sell opportunities? Ultimately, BI tools will give manufacturers insight that will increase profitability in service operations, optimize the sales and marketing strategy, and allow them to more effectively manage customers.
Benefits of a Transformation Solution
Manufacturers with a service transformation focus can significantly improve visibility across their global services value chain and proactively adapt to changing customer requirements. With robust service-specific applications, tight integration, and advanced analytics for predicting product performance and service profitability, manufacturers are able to design solutions to optimize service profitability, enable remote monitoring of product performance, measure the performance of assets to achieve service-level agreements, and more proactively manage equipment uptime.
Best-in-class manufacturers looking to transform service operations can expect a better-performing service chain, wider profit margins, and more-efficient marketing and sales campaigns. They will be able to improve workforce productivity and the profitability of service operations. Most importantly, they will be able to provide outstanding service to their customers, who will return time and time again.
“In today’s market, growing service revenue is table stakes for industrial manufacturing companies,” says John Govoni, global industrial manufacturing industry lead at Oracle. “Many of our customers are looking to us to help them transform their businesses from product-centric to service-centric, and need processes and tools to drive this change.”