service growth industrial

Industrial Services as a Growth Business

The classical definition of a services business is one that provides intangible products, such as, accounting, consulting, banking and repairing. This definition gets a bit murky when you start talking about services in an industrial sector and many industrial companies are challenged when it comes to investing and growing the service franchise.

Whether you are the head of a power plant or an owner of a finely German-Engineered automobile, at some point in the life of the asset, it needs to be serviced, fixed, repaired, upgraded or overhauled. The company that provides this service before you know it needs one through Predictive and Preventative tools has the key advantage over their competitors. If you analyze your current business model in depth, there might be somewhere a service component that can be your next growth engine.

As business models evolve, capital equipment providers are creatively thinking on how best to continue the current relationship with their customers after the original sale is done. Think about the rotating equipment manufacturers (e.g. gas turbine) who have successfully launched back-end servicing capabilities for their equipment that continues to generate a service revenue annuity for many years.

As customers are cutting their CAPEX spend and continue to operate their assets for longer periods, it creates an opportunity to increase the service growth. Typically, the growth rate for the service business is approximately 2x of original equipment growth and this growth comes with higher gross margins of at least 5% to 10%. When companies neglect the service side of the business, third party vendors have provided that service and taken over the customer relationships from the OEM. This becomes acutely important in Emerging Markets where companies do not have the necessary infrastructure to serve the customers and they end up with a coopetition situation where your channel partners sells your products and services to them.

As a starter, here are three important considerations in your pursuit to build a world-class service franchise as part of your current offering:

Creating a menu of service offering

If you don’t have any service offering today, do a bit of data mining on the historical installed base of your products to determine the size of the opportunity. It is amazing how many companies lack this important information, which could potentially be a gold mine for creating service revenue annuity in the future. The scope of a typical service offering could be so broad; it helps to map out where your company has competitive advantage over third party firms and create a set of offering around these advantages.

Map out the company’s service offerings end-to-end and seek customer input on the desired service levels to find your sweet spot of offerings to a particular market segment. For a typical industrial company, the offering can span from field installation, field services, consulting, parts, upgrades, repairs, overhauls, software upgrades, calibration, training, and the ultimate model of managing the asset for the customers through predictive tools. Smart companies have introduced remote monitoring and diagnostics of assets with condition-based service models. In this knowledge based service model, the customer and the company will share the risks and rewards of maintaining the assets based on certain performance metrics. Some companies are talking about using the Big Data to transform information to revenue and growth, but this model is still in its infancy. Until one can prove definitively the economic benefits of the Big Data to the customers, they are unwilling to open their wallet.

Generally speaking, a big portion of service offering is replacement parts. For the critical and expensive parts category, companies can partner with the customers to manage their inventory and share the risks and rewards of maintaining an optimum level of parts inventory. Consider creating a menu of service offering so that customers can pick and choose the service levels. There are situations where a company may give away certain aspect of the offering (e.g. software) in order to capture value through pull-in of other products and services. Another creative model is to be a full scope service provider where you not only service your products, but also your competitors’ products. Of course, this has inherent risks but if you have the technology edge and the customer is willing to work with you, this could be a unique offering. The ultimate service model is total asset management on behalf of the customer and this has the highest risk and reward equation.

Measuring and delivering service

Companies who have excelled in the service model have created a dedicated service team to manage the scope. Additionally, just as with any product sales, there are key service metrics that are measured, evaluated and delivered to achieve total customer satisfaction. Some of the traditional KPIs’ for services are first time fix rate, field service utilization, on time delivery, parts availability and lead-time.

There is always this creative conflict of selling a service offering vs. selling a new product to solve customer issues and you can address this situation by asking the most fundamental question: What is the best value for your customer?

This leads to the universal dilemma on whether sales for services are kept within this group or combined with the new product sales team. In order to create a seamless growth organization with clear metrics, it is recommended having a dedicated sales team being part of the services organization. This model can help break down silos as the team still needs to collaborate with new product sales team and the engineering team to provide the full breadth of offering to the customers.

Companies who predominantly serve the customers through indirect sales channel have difficulty managing the service business. If you are using channel partners to provide services, it is important that as an OEM, you follow up with the customers to keep the direct link to your customer base.

Building a world class service team

One of my mentors used to say, “service people are not wrench turners; they’re top-notch professionals who take care of our customers 24/7.” I wholeheartedly agree. Building a world-class service company means fostering a culture of pride in serving your customers. As I have seen first-hand, these people go beyond their normal work schedule to delight their customers. The service business is “people business” and as such, the trust and bond between this team and customers is important. This trust is built over years of impeccable service.

A service team that looks sharp, communicates professionally and tackles the customers issues thoroughly will help build a strong brand for your company. Invest in your service team by training them both technically and commercially and create a unique reward system that rewards the service culture within the company. Pick a service leader who is both customer centric and hands-on, and make sure this leader has a seat at the management table. To sustain a service culture, it is important to create a strong career progression plans for service professionals so that it becomes an attractive career path for new and young professionals joining the company.

In my last two roles in the Emerging Markets (Middle East and Asia), we created a brand new dedicated service organization. In both cases, we started seeing incredible results six months after we launched the program. The service leader reported directly to the head of the business, and this team was housed in a separate service building adjoining the service shop. In addition to service specific metrics described above, we measured typical KPIs’ of safety, quality and delivery on the operation side and booking, sales, margins, and working capital on the financial side of the business.

The best way to find your next customer is to serve your current customer to the maximum extent.

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