How does a product-oriented company make a successful transition to services? A leader in elevator manufacturing and production explains, "In essence, we give away the elevators in order to get the service contract. Once we have it, we make elevator operation and service totally transparent to the building owner. In fact our services offer is so compelling that we now service more competitor elevators than our own."
Companies like this are not valuable because they can repair equipment, they are valuable when their customers' operating costs are lowered, their customers' service levels are increased or their customers' revenues or profits grow through process innovation. While it is hard to deliver highly valued services, those that do it break through to become real partners with their customers. This article will explain how to start.
In a recent study by FiveTwelve Group, Ltd. almost 90% of 173 North American machine manufacturers interviewed said that in order to defend against low cost "replicator" competitors and protect against potential market contraction, a greater percent of their future revenues must come from services in addition to and sometimes in lieu of the machine products that they sell today.
The trend exposes a fundamental shift in the ways that these companies will add value in the future. Whereas companies that sell machines are often judged by how well and long the machine that they offer meets its functional purpose; service companies are valuable when their activities create a path for the consumer's resources to be shifted to higher valued uses. This outcome demands that the service provider have a more precise and in-depth understanding of the customer's behaviors, attitudes, methods, processes, structures and activities; often a much greater understanding than they have had to have in the past to do business with that customer.
While high price pressure weighs heavy on machine builders' minds (46% said it is their primary hurdle), a notable 28% of respondents recognize that they are far more vulnerable to it if they don't quickly gain clear understanding of what customers' value.
The study also found that while almost all machine manufacturers have grand service ambitions -- 90% said that they plan to sell more services -- there is a wide and deep chasm between companies that have declared that they will develop service competencies and those that actually do it in a meaningful and profitable way. The chasm is so dramatic, in fact, that it clearly delineates market leaders and laggards. Those that find their way across the chasm dramatically outpace their peers in sales growth and return on sales and service market share capture. (See figure below.)
Why So Difficult?
Machine companies that hope to transition to services face a myriad of pitfalls and missed opportunities:
Launching An Incomplete Service Offer
- Machine OEMs often assume that they understand the scope of a customer's service needs, so the resulting service offer falls short of customers' objectives. Frequently, these contracts are "in-sourced" once the initial term, and the cost-out efforts are complete.
Overdependence On Technology/ Under-Developed Process
- A newcomer to the services business often overestimates the impact that technologies may have on service delivery and underestimates the service infrastructure and human resources actually required to create an effective and cost efficient offer.
Insufficient Competitive/Alternative Understanding
- Usually, service work is already being done by others like internal staff, local contractors, a local distributor or a service specialist. Or, alternative methods may have already been explored. To overcome existing relationship or perception barriers, companies need to not only understand what the existing service structure is, but also why it is that way, how it has changed and what was involved in the decision making process that results in today's arrangement.
No Defined Course To Service Objective
- Most companies that try to create a services offering do so by first augmenting current products with related services and then stumble into the rest of the program; whereas those that do cross the chasm tend to be ones that draw up new plans for a stand alone services offer that depends on fresh talent and new technologies that leverage the company's core IP.
So how should a machine manufacturer re-tool all or part of its business to deliver services?
- Distinguish between machine vs. services value:
As product-based companies, most machine manufacturers have focused on the machine function in the context of the customer's application of the machine. The most successful companies have historically been those with the best understanding of machine-related processes and use that understanding to add and refine functionality to deliver the highest cost-benefit value at the time of purchase.
A loyal customer is one that recognizes long, reliable predictable machine life. Service contracts are issued based on initial cost-benefit analysis too, but can be evaluated over the life of the contract with building scrutiny. Unless the supplier's service activities create a continuous path for customer resources to be shifted to higher-valued uses, customers often don't buy services more than once.
Without the ability to show ongoing, measurable process improvements to customers and without an evolving services offer, companies that try to sell services often find themselves competing in commodity markets much the same way that product companies do, sometimes more quickly than before.
- Stage durable service value:
A manufacture with service ambitions should compare how services offers are like or unlike their product offers. Then, it can ask the right questions to determine whether or not a services offer will return and how it can build informed plans.
While machine and service purchase decisions often look alike, machine benefits can sometimes be more tangible and easier to understand than service benefits. Therefore, the company should ask: "What will it take to sell, market and develop consultatively?"
Machines are often selected by committees of operators and managers and are approved by financial gatekeepers, while service needs often go unrecognized by internal teams, and are introduced as process improvements by managers, consultants or process designers. Furthermore, the decision to purchase services often has other business change consequences -- so leaders often shop and decide and operators have to be willing to accept the change when it comes, without sabotage. Therefore, the company should ask: "Does the company own the right relationships today? Are those relationships deep enough? Who does own them? What will it take to build them?"
Successful innovation is equally important to machine and service companies, because it provides competitive advantage. However, as we have said, many types of services can be replicated very easily by the buyer, so service companies can be put at higher risk of vertical integration faster. Therefore, the company should ask: "Do we have the customer process knowledge and the research vehicle to refine and upgrade our services offering, starting immediately after launch?"
Customer Needs Understanding
Clear value understanding is the most important ingredient to any offer, but distilling actual service needs into something that can be addressed with a tangible commercial offer can be very complex. The company should ask: "Can we articulate a clear value proposition with our service offer?"
Both machines and services have a useful lifespan that the supplier must manage. Additionally, customers often identify machines with brand names but they identify services with the people that perform the work. So the company must ask: "Do we have the market's most outstanding people, talent and technology? Can we stay on the leading edge?"
Will services distract? Services businesses are usually people-intensive, especially at the start. A manufacture with service ambitions must be ready to learn or acquire new skills and/or allocate the time and energies of some of its best talent to make the business work. It is critical to understand whether or not this diversion puts other areas of the business at risk.
Perhaps the most important planning exercise is clearly defining the role that the company will play in the market, and why it will be important to customers. A value map should answer the following questions:
- Where will service originate? Will we incubate, source, partner or acquire?
- What value will we provide? Will it be lower operating cost, intellectual property, consolidated outsourcing, asset management or something else?
- What markets will we work in? Will we stay in our tradition markets, or is our idea more valuable elsewhere?
- What customers will we target? Will they be current customers or competitor's customers, the customer of adjacent systems, or customers with unrelated systems?
- What specific needs will we meet? Will we solve problems in maintenance, production support, secondary operations, primary operations or somewhere else?
Assuming that it still makes sense to proceed: the best will follow some additional common sense guidelines:
Things not to do:
- Don't think of services as a sideline business -- treat the services offering as a business that will be successful if it has the talent and technology to achieve competitive advantage.
- Don't think services are needed when they are not -- just because a company has services to sell, doesn't mean someone will buy them. Market and customer research must reveal actual customer behaviors, alternative methods and the gaps that that a service offer will fill.
- Non-value-added activities are poor target applications for want-to-be services suppliers -- just because a company can provide a cheaper labor alternative to a manual operation doesn't mean that outsourced services will be valued. Non-valued activities are better made unnecessary than outsourced.
Things to do:
- Go to the source for market understanding -- Who will buy services and why? Marketers should build a hypothetical target customer with service needs and an ideal supplier, and then test their ideas in systematic customer research that includes both in-depth probing and quantitative broader market checks. The customer's clear voice must inform the business case.
- Refine the offer with technology, but don't think that technology is the offer -- Market over-performers recognize and invest in technology as a service-enabler -- they see that service without technology is not profitable or sustainable and that technology without service is a non-starter.
- Measure the results -- In our research, the companies that have made the transition most successfully have set ambitious, but realistic objectives for services, measured in at least three ways:
- Service revenues and profits.
- Growth of services revenue and profits as a percentage of company sales.
- Pull effect of services on products, and products on services.
Against all other factors, the research reveals that the most important distinguishing characteristic of a market out-performer is that they give high business priority to services once service value is understood and delivered. While many will find themselves dabbling in services, outstanding performers make value creation from services their mission.
Nicholas Hayes is a partner at FiveTwelve Group, Ltd, (www.fivetwelvegroup.com) a management consulting firm specializing in business-to-business research, marketing and product strategy.