It is no longer breaking news to say that the US and the European Union (EU) are turning from product-based to service economies. The trend of the increasing importance of the service sector has only been accentuated by the recent (and perhaps still ongoing) subprime mortgage and financial system meltdowns, volatile stock markets, declining durable (hard) goods orders, dwindling physical product-based profit margins, and so on and so forth.
But one saving grace for these developed (the Group of Eight [G8] and beyond) countries’ economies could be the post-sale service or aftermarket business model offering services to fix (repair), maintain, and optimize products that are sold to installed bases. While durable goods orders decline and product-based margins diminish in maturing and commoditized industries, service margins remain very healthy. Thus, service businesses currently contribute about 70 percent of the world economy.
Today, companies understand that post-sale service is a real business opportunity if they can get it right. Again, service margins can be multiple times greater than product margins, a fact that is now garnering the attention of operations executives across diverse industries. Perhaps most importantly, aftermarket is the piece of the operation that lets companies understand customer needs and exceed expectations.
Particularly during difficult economic times, hard goods manufacturers have an opportunity to up-sell service level agreements (SLAs) and other peripheral customer value props while improving profit margins and fostering customer loyalty. For instance, AMR Research (a Gartner company) reported back in 1999 that businesses earn 45 percent of gross profits from the aftermarket, yet it is only 24 percent of their revenues.
Service as a Business (SaaB) and Business as a Service (BaaS)
As possibly the best example, General Electric (GE), starting with Jack Welch’s long chief executive officer (CEO) tenure, has been widely reported to have significantly increased both its total revenue and profitability by focusing on services opportunities in addition to developing world-class products. The manufacturing corporate giant has certainly proven the value of serving the complex products aftermarket, which has recently been purported in a quantifiable manner by many pundits as a high-margin business.
Indeed, expensive, long-life assets, such as aircraft engines and construction equipment, are historically sold at low margins, but with lucrative service contracts. More often of late, such products are considered loss leaders as a way to sell more predictable and profitable long-term service contracts.
In the high-tech sectors there is a commoditization of the hardware, which promotes services into the next battleground. Customers look to available accompanying services to help them make their purchase decisions.
The recent Harvard Business Journal (HBR) article entitled “Winning in the Aftermarket” links customer satisfaction to revenue. The belief is that well-served customers become repeat customers, which customers then create a continuous revenue stream for the company.
In the non-manufacturing realm, premium chain hotels are attempting to discern their clientele preferences and accommodate their (sometimes quirky) preferences as they stay throughout the world. This attention to detail enhances brand and increases repeat business while fostering quite profitable room rates. Staying close to the customer and personalizing service helps create barriers between the service providing company and its competitors, increasing the probability of repeat purchases.
In other words, companies increasingly understand that there is a total lifecycle of a product, and that they can really create a major after-sale profit center through this often long lifecycle. Selling a product is a one-time event with a one-time revenue and margin opportunity. Conversely, servicing that product creates revenue and margin opportunities over the life of the product, which can be measured in years (if not even decades).
Another service paradigm is an offering in which a manufacturer may not even sell the product it services at all. A good example is a copier company (e.g., Xerox) or an office supply company, which will lease out its copiers, fax machines, etc. Included in the monthly lease payment is the cost of maintaining the equipment. So, the customer is not paying for the product at all, but rather for the “use” of it. And, of course, there are the normal SLAs and guaranteed “uptimes” (for a premium) involved.
Another example of this paradigm is Hill-Rom, which manufactures and rents advanced care beds and a variety of other mobile medical equipment to hospitals across the US. The company also offers the servicing of its mobile equipment (e.g., maintaining the beds, cleaning and storing in fusion pumps, etc.) and, interestingly, leverages RFID tags on the equipment so that the location and disposition of these items are easily acquired by both Hill-Rom staff and hospital staff.
Another recent HBR article claims that we spend US$1 trillion every year on assets we already own. Not surprisingly, maintaining and fixing the latest models of cars all too often requires specialty (computerized) tools, and thus a trip to the authorized dealer.Independent and franchise automotive shops often have trouble learning new tools and methods and competing in time, quality, and price. Designing proprietary components can help lock in customers to use the particular car manufacturer’s service rather than going with a third-party service provider, let alone do-it-yourself (DIY).
The aim of many of earlier customer service-oriented enterprise applications was to make the internal service departments as efficient as possible and reduce costs. Maintenance of large-scale industrial equipment has traditionally been provided by a combination of the equipment supplier and the local facility maintenance and engineering personnel.
However, as the in-house maintenance ranks dwindle because of attrition and retirement, enterprises are increasingly dependent on outsourced maintenance providers or on the equipment suppliers themselves. This has opened up a new service market opportunity for equipment providers, many of whom have developed new business models, offering multiyear asset maintenance and asset performance management (APM) service agreements to their manufacturing clients.
This shift from enterprise asset management (EAM) as an internal cost burden to asset maintenance as a business has created new software support requirements and modern EAM and field service management (FSM) software suites. These offerings typically include help desk, customer call center, spare parts management, work order management, and workforce scheduling and dispatch.
Evolutionary and new business models are creating competitive advantages for companies that can proactively anticipate, understand, and address customer needs, ultimately leading to increased profits and customer loyalty. The culmination of these endeavors is the ability to offer performance-based services, where performance can be defined as the product or service availability, quality, customer experience (satisfaction), or the combination of a variety of other factors. The main point of performance-based contracts is that they align incentives between the end customer and the service provider.
Sizing the Service Opportunity
A recent Aberdeen poll of chief service officers (CSOs) indicates that 74 percent of companies expect global economic uncertainty to have the greatest impact on their service business in 2010 (although 91 percent believe that the state of the global economy is likely to rebound through 2010). In addition, 49 percent of CSOs anticipate increasing their service workforce and 41 percent anticipate increasing their budget for service-specific technology in the next 12 months. Finally, 31 percent of CSOs cite driving service revenues as the top goal of their service organization for 2010, whereby the mobile computing technology will be a key driver.
ClickSoftware Technologies has recently evaluated its market opportunity in the high-end market (i.e., companies with over 500 service personnel) to be about US$18 billion. This calculation was based on Gartner’s estimate of 9 million field engineers in over 8,000 companies in the world and with the figure of US$2,000/field engineer (for software license, services, and support). Similar midmarket potential (i.e., 12,000 companies with 100 to 500 service personnel) was estimated to be US$12 billion.
In its book entitled “The Future of Enterprise Applications”, AMR Research estimated the service market to be about $4 billion in 2006. This market comprised aftermarket services, EAM, and maintenance, repair, and overhaul (MRO), each representing roughly a third.
I concur with the expectation that aftermarket services and EAM will join together in the next few years as the relevant vendors continue to encroach upon each other’s space. I also expect vigorous growth in this market as companies shift from product-based sales to service-based sales. Examples are already prevalent in the aerospace and defense (A&D), automotive, and industrial equipment industries.
As the US and EU markets continue to drive away from manufacturing to a more services-centric model, the twin factors of workforce mobility and the inherent “change” factor tied to people- and parts-based industries has spawned a host of new technologies, software applications, and support structures. Simple customer relationship management (CRM) strategies have birthed new wired and wireless field services management (FSM), remote asset management, and multi-echelon logistic operations.
In fact, the following are some major service market growth drivers:
The Customer Remains in the Driver’s Seat (and Wants Instant Gratification)
While consumers may not be purchasing a new automobile, electronic gadget, or household appliance any time soon, they will pay to have their existing ones serviced. However, they do not want to waste time waiting indefinitely for a (perhaps completely clueless and uninformed) repair person to hopefully show up (i.e., the so-called “cable guy” syndrome). On the business side, companies will not necessarily purchase new computer server farms or the latest telephone systems, but they, too, will pay for SLAs with immediate repair options, as their businesses cannot afford to lose time waiting on a field technician.
Offering appointments to customers for deliveries or repairs used to be fairly simple: all day, morning, or afternoon appointment windows were the norm, potentially leaving the customer waiting at home for hours. Today’s service businesses are forced to give customers more choice: four, two, and even one-hour windows are offered. Moreover, Web-based self-service appointment booking by customers is a great way to avoid the long call center waiting times with an annoying music and intermittent ”Your call is very important to us, … please stay on the line, …” announcements.
When an appointment is set a day or a week prior to the day of service, a four-hour window is still acceptable in today’s world. However, as soon as the actual day of service starts, information should be available to allow notifying the customer on a narrower time interval for the technician’s arrival time, e.g., if the service provider knows for sure that the customer is, say, third in the route of the technician. As the day develops, better predictions can be made using information from the mobile device of the technician or his/her location via a GPS navigation device.
In his 2007 guest article in Field Technologies Online entitled “The Age of Real-Time Service Enterprise,” Dr. Moshe BenBassat, ClickSoftware’s founder and current chairman and CEO, says that organizations that use mobility technologies merely for communicating information between the dispatchers and the field force are not leveraging the full potential of mobility technologies because the burden of decision-making is left for the dispatchers.
Modern service organizations recognize that real-time communication devices (mobile phones, handheld computers, laptops, GPS units, etc.) should not be just about data transmission and map displays. Rather they should be about the ability to act in real time on these data streams and produce optimal decisions for resource allocation and job scheduling.
Communication should be far more prevalent during the service process than it is practiced today at most service organizations. Communication between customer and service organization, for example, should be available at all times, rather than at two points in time as it is today–once when booking the appointment and once when the service engineer arrives.
The customer should be able to initiate (”pull”) update the appointment, ask when the engineer arrives, and also receive notifications (”push”). This not only raises customer satisfaction, but it also saves costs for the service organization. Communication within the service organization could also deliver substantial value, as explained in Clickipedia’s blog post on “the field service paradox.”
With even a small workforce of a few hundred field technicians, reacting adequately and in real time to the constant stream of new field data is well beyond the capabilities of any human brain. By connecting decision support and optimization algorithms to the real-time stream of field data, this objective can be achieved and the schedule can be continually optimized. But how service planning and scheduling is done will be the topic of another blog series.
Can Technology Help Service?
The aftermarket service realm today leverages technology at least in two important aspects. The first aspect is with regard to setting up the whole outbound, multi-echelon supply chain network to service customers. The goal is to understand what the customer requirements are and then build a network so that the company can make a profit at servicing, instead of just stockpiling costly parts everywhere. Designing the network for serviceability considerations include where to place part-stocking locations (nodes) and repair depots and how many facilities and locations to have.
Needless to say, it is critical to ensure that the right field service engineers have the right parts and expertise to deliver service within the service level promised. One high-tech company has a control-center (a situation room of a sort) view of its service network. As it signs on new customers, it can evaluate whether it has the wherewithal to meet the promised service level to the customer, or if it needs to add capacity or change the terms of the SLA.
One of the major factors in service cost and repair time is the management and optimization of service parts, with optimization software tools currently moving from a niche to mainstream functionality. As described in great length in my blog series on MCA Solutions and Servigistics, understanding the various levels of criticality of certain parts to product uptime and balancing the tradeoff between service levels and the service parts inventory budget are extremely valuable but challenging propositions.
Software-based mathematical models are being used to support some key functions, such as determining optimum network design, calculating the mean time between failures (MTBF) , and optimizing the tradeoff between maximizing service levels and inventory investment. This type of decision support is helping redesign network nodes and distribution models, while also feeding critical information for preventive maintenance and even product design. The organizations that have implemented the tools and expertise to support new service models are able to proactively simulate, model, and test their planning assumptions and outputs.
The second aspect of the technology is related to total product and service lifecycle management. Namely, there is tremendous data locked up in all those customer interactions. There is also tremendous data locked up in the product itself, in terms of how it performs (and eventually wears out) in the field. So how can a company capture that vast and valuable field information about its customers and the product’s performance, and feed that back into the product development life cycle?
While products in the field have service history, new products have little data on common failures, costs to remedy, and ultimate performance. Mastering this competency is the difference between extremely lucrative, high-profile service deals, and financial disaster. Should perhaps field personnel be considered as people who have performance bonuses tied up in how many customers they serve, how much new business they bring in, or how many new improvement ideas they suggest?
The idea is to constantly make better products and create better business models to serve customers. Profitable service begins with creating products that are designed with specific features to aid the service personnel. Examples include replacing assemblies rather than fixing small components, and locking mechanisms rather than using screws. Most importantly, it means detailed and accurate repair information and timely service bulletins in the hands of technicians when they need it.
On the business side, quite simple business math (i.e., “revenue” minus “costs” equals “profit”) is still not that simple to deploy at many companies. These environments have no knowledge of their true costs and expenses, and therefore no knowledge of profitability, which leads to ineffective service pricing. Even worse, they have little insight into their products’ performance at customers’ facilities, where they are often legally bound.
As buying patterns change to offset more risk to suppliers, service-minded businesses need greater insight into service metrics. Most service businesses measure their performance using key metrics such as resource utilization, jobs completed per day, first-time completion rate, and response times.
But reporting yesterday’s performance is often too late and of little use. Vital decisions that could have been made earlier to turn around the performance are gone and the opportunity was missed.
Thus, service chain optimization software tools must monitor the metrics in real-time giving the company time to respond and to take corrective action to improve today’s performance. If one area has too much work and response times are suffering then resources can be temporarily relocated to alleviate the pain. Real-time reporting capabilities enable real-time decisions to be made quickly.
The next part of this series will introduce the concept of service lifecycle management (SLM)and typical related software solutions. The blog post will also focus on the latest mobile technologies and service workforce trends.
In the meantime, please send us your comments, opinions, etc. We would certainly be interested in your experiences with this software category (if you are an existing user) or in your general interest to evaluate these solutions as prospective customers.
I’m new to your blog (and this site); forgive you for whatever impedance mis-match here.
When you wrote “the customer is not paying for the product at all, but rather for the “use” of it” with regards to XEROX what came to mind is how becomes my main revenue stream.
Might someone pay for what appears to me nothing more than an Ajaxian widget? Well … they might not pay to purchase, but what about the “use” of it”?
Use FMECA as an example. (Failure Mode Effects Criticality Analysis) The suite of spreadsheets and analytical tools in the back end are daunting, I know that first hand. But the use of it? Rather straight forward, for each element.
I suspected long ago that maintenance would increasingly involve services. (When I was with NORAD/SAC I did trouble-shooting of the microwave network remotely. In material terms all I did was have a series of rather long telephone calls!)
Perhaps I’ve slipped out of gear here, but I can’t help thinking that we’re dealing with the virtualization of products.