Tag: #opex

Digital Thread: How the Service Bill of Materials Enables Cross-selling & Upselling

It’s 2010, and an OEM has asked me to blueprint their after-sales organization. I went to our sales executive and asked, “What do we tell our customers about life expectancy and maintenance costs when we sell the product?” He looked at me with a confused look.

Why is this important? Because, if you want to cross-sell and upsell services in the after-sales domain, you need to know what value was promised when the product was sold. This is where the service manual and the Service Bill of Materials come into play.

This blog is part 3 in a series of three:

The value promise of the product sale

My sales executive sold complex capital equipment. For each product in his portfolio, engineering provided him with technical specifications describing the output capabilities. He would ask customers for their intended use profile and select the model that had a matching output bandwidth. To not complicate his CapEx sale, he would avoid a conversation on:

  • How many years will the product be able to sustain specified output levels?
  • What is the expected decline in output levels given the customer use profile?
  • What maintenance efforts are required to sustain product specifications?

Upon delivery and title passage of the product, the buyer would have access to the operator and service manual. These provided insights into the ‘size of effort’ required to use and sustain the product. If a total cost of ownership calculation were a prerequisite to the product sale, my sales executive would defer the calculation of the OpEx piece to the after-sales department.

Total cost of ownership

I’ll skip the semantics on if we should talk about the total cost of ownership or lifecycle cost. The idea is to create an understanding of what it costs to sustain the product over a prolonged period of time while maintaining output specifications.

Once more we can draw on the intellectual property and effort from engineering. As we’ve mentioned in part 1 of this series, the service manual describes the efforts needed to maintain nominal output specifications. To put it another way for the customer, “If you maintain your product as stated in this document, we, the OEM, guarantee the output specifications.” Thus, when we cost/price those activities, we have a pretty neat approximation of the OpEx piece of TCO.

Title passage

When an OEM is in the business of CapEx sales, it will have a title passage of products. Beyond title passage, all pains and gains of the product transfer to its owner. Now it is the responsibility of the owner to act upon the instructions in the service manual. Most likely there will be a clause saying that non-compliance with these instructions ‘may’ void OEM output level guarantees. There may be a clause that voids the warranty when non-authorized parties perform maintenance activities on the product.

This is where it gets interesting and dualistic at the same time! On the one hand, the OEM bestows the risk of owning the product onto the buyer. On the other hand, the OEM wants something from the product buyer post-title passage—“buy my maintenance services.”

This happens in a context where the owner of the product has the legal right to choose to follow the user manual instructions, to ignore or deviate from them. The owner can also choose to perform the activities themselves or to outsource. If your business model is driven by title passage, you can’t force a product buyer to buy associated services. You can only entice product owners to buy your services.

Cross and upsell

The first step to cross and upsell is establishing a baseline on what comes included with the product sale and what is extra. If the product is sold with a warranty, the warranty conditions will define what is included and what is not. It is important to clarify that a warranty is predominantly promising the correct working of the product. Not a ‘free pass’ to mitigate actual wear & tear as a result of using the product.

The second step to cross and upsell is having a conversation on how the owner will use the product. When the use is exactly as envisioned by engineering, then the operating and service manual will define the maintenance standard for sustaining the output specifications. When the customer uses the product in different settings, you may want to introduce ‘bundles’ of maintenance activities associated with low, medium, and high usage. Call them bronze, silver, or gold. For more granular services you may want to use a concept like a menu card.

Once you have jointly agreed on what maintenance activities are required to sustain output specifications given said use profile, the final step is defining who does what. This is a risk versus cost conversation. Either the product owner bears the cost and risk of using the product or those are outsourced to a service provider/OEM at an agreed price.

Companies that have a large installed base of products and trained internal technicians may choose to execute the service manual activities themselves. Others may evaluate the risk versus cost differently, and buy services ranging from preventive maintenance to full service. Mastering the risk/cost conversation in conjunction with intellectual capital captured in the Service-BoM and service manual will become your toolset for cross-selling and upselling.

Digital thread

In three blogs we’ve spotlighted the Service Bill of Materials through the lenses of cross & upsell, system of record, and linking engineering to service. We’ve seen the value of the digital thread spanning engineering, manufacturing, service, and sales—proving value across the entire product lifecycle.

This article is published on Field Service Digital.

Why Are Sales Leaders Taking Over Service?

For a couple of years now, I’ve been writing about the convergence of Sales and Service. Service, with all its touchpoints during the operational life cycle of a product, has a tremendous capacity for value creation. To reap that value, Service needs a little more Sales DNA. Likewise, Sales needs a little more heart for Service. With a shift from revenue contribution to margin contribution, we see Sales ‘taking over’ the Service Revenue agenda.

You Now Report into Sales

A true story. I’ve had extensive experience running service departments. In all those years my main objectives were focused on service delivery and operational excellence. Over time, I saw an increased interest in service margin and service revenue. When my former organization updated my business objectives with a service revenue target, that goal came as part of a package deal: “you now report into Sales.”

Initially, I did not understand how reporting into Service or Sales when having a service revenue target would make a difference. At that time, the prevailing current was that revenue generation was the prerogative of Sales. Service was seen as a delivery engine focussed on operational gain.

Over the years, I’ve witnessed a dynamic between Sales and Service when it comes to the ‘claiming’ of business case benefits. Lately, a CEO put the reasoning into works while we presented the business benefits of a digital and service transformation project to his executive team. The CEO attributed productivity and cost savings to operations and service. He associated revenue targets with sales. When our business case showed significant revenue benefits through improving installed base visibility and attach rates, sales were the first to claim credits and ownership. For sales, these two improvements translate into touchpoints and conversion. This duo is the bread-and-butter of the sales process.

Bridging Sales and Service

Though sales leaders may be taking over the revenue growth agenda, we all know there is a huge difference between selling products and selling services. The engagement model is different. The buyer role is different. The appraisal of Capex versus Opex has a different impact on decision-making, etc. Most of all, it’s a simple numbers game. Sales revenue is big numbers, service revenue is smaller numbers: Guess who will be seen as the hero?

Any CFO can tell you that services, despite carrying a lower revenue amount, often have a significantly higher margin contribution. What if we were to start incentivizing salespeople with a margin contribution target rather than a revenue target? Great idea? Too radical? Maybe such a move could swing the pendulum in the opposite direction. If all your salespeople were selling services, you would forget you need an initial product sale to make the model work.

So we are back to an earlier blog post I wrote about the importance of Sales and Service Working in Collaboration. The initial product sale is like an ‘entry ticket’ to selling adjacent services. Using the analogy of a theme park, say Universal Studios or Legoland, once you are inside and start spending money, that’s where the EBIT is made. It is the achievement of ticket sales to get you inside. It is the effort of the entertainers to keep you inside as long as possible…and spend money. Are both roles different? Yes. Is one role more important than the other? No.

Building a Portfolio of Lifecycle Revenue Generators

We can transpose the analogy of a theme park to the world products and services by illustrating two common situations:

  • Product sales over-promises: Making it hard(er) for service to sell attached services. In effect, you’re trading high-margin contribution activities for a lower margin contribution.
  • Services portfolio not appealing enough: Making it hard(er) to generate service revenue and providing customers with reasons to churn.

Both examples should compel any product/services company to rethink their revenue generation and margin contribution ‘building blocks.

More and more sales leaders are understanding that revenue generation spans the entire lifecycle of the sold product. The realization that the post-sales value proposition has a symbiotic relationship with the pre-sales value proposition, triggers sales leaders to claim control of the services portfolio and the lifecycle go-to-market strategy.

Now you are thinking: is this the job description of a Chief Revenue Officer (CRO)? Yes, you are close. When a buyer applies a concept like total cost of ownership (TCO) in weighing a purchase, then the response on the sales side converges in the responsibilities of a CRO.

Is it bad for Service when Sales leaders are taking over? I believe not. I think Sales and Service have different but complementary skills to drive the revenue growth agenda. Sales DNA finds Service Heart!

This article is published in Diginomica on June 9th, 2021 and ServiceMax Field Service Digital on June 17th, 2021

Equipment as a Service

Do you want to own a car, or do you want to drive it? Do you want to buy and maintain a piece of equipment, or do you want to operate it?

In our business practise we often have these conversations when reminiscing on what really matters to end-users. We tend to believe it’s about outcomes and value, call it Servitisation. Still we see a lot of conventional decision making focussed on the product and associated Capex.

Voice of the Customer

According to a research by Accenture[i] around 10% of the life cycle cost is linked to designed and acquisition. The other 90% of cost is incurred during maintain, operate and disposal. Thus, it is not surprisingly that we witness an increase in customer awareness concerning the maintain and operate phase of a product.

The maintain and operate phase is as important to the customer as it is to the supplier. Witnessing dwindling margins on the product sale, suppliers are (re)focussing on the profitable margin contribution of maintain and operate services. At the same time customers are trying to reduce their operational expenditures. Focussing on the voice of the customer is often the path to finding a long-term partnership compared to short-term commercial “victories” of either party.

We want to reduce our operational expense but realise that we need the supplier in the long run.

 Why should I own the Product

The road to servitisation often starts with a simple question: “if I only want the value/ outcome of a product, why should I bear the risks of owning it while the supplier holds all the knowledge about the product”.

  • Rolls Royce “invented” Power-by-the-hour offering because the Royal Airforce demanded a fixed cost per hour in 1962.
  • Philips created Pay-per-Lux in 2015 as a result of an academic experiment with Schiphol Airport only requesting light.
  • Bosch Siemens Hausgeräte offers refrigeration-as-a-service to housing corporations reducing total cost of ownership while at the same time minimising ecological footprint.

The common thread in the above three examples is that these manufacturers transformed their business model from one based on Capex and Title Passage to one based on Pay-per-Use and partnership.

It’s a matter of looking at a bigger picture beyond the typical functional boundaries inside any organisation:

  • Apart from the one-time-sale, what is the “win” for a manufacturer in selling a piece of equipment the customer is not able to use?
  • Apart from a short-term saving, what is the “win” of a discount for a customer when it stiffens innovation?

The transformation towards outcome-based service contracts enables both manufacturer and customer to define mutual and sustainable value.

A Product is the carrier of its Outcome

Leap of Faith

To a certain extent buying/ selling a Service rather than a Product is a leap of faith. Both manufacturer and customer are in for a paradigm shift.

  • A manufacturer will have to recalibrate from the concept of infrequent revenue recognition to sustainable margin contribution.
  • A customer will have to disconnect the outcome of a product from owning it.

Thus, we see manufacturers and customers not completely abandoning the Capex & Title Passage business model, but we see them adding a business model based on outcome-based services once their mindset embraces the bilateral value promise.

Gartner[ii] expects that by 2023, 25% of commercial or industrial OEMs will offer IoT-connected product(s) via outcome-based service contracts

Seconding the transformation towards outcome-based services is the rise[iii] of the role of the Chief Revenue Officer (CRO). With a lesser margin contribution from the product sale organisations are looking at means to tie in the margin contribution of services. With a CRO organisations are putting all their eggs in one basket regarding to drive sustainable and profitable revenue growth. Companies with a CRO are leading with outcome- and subscription-based service offerings.

Digital and Connected

In an outcome-based model the focus shifts from Owning to Using. Digital technology and connected products are the key enablers in understanding and managing product usage.

It starts with creating full visibility of how a piece of equipment performs in the business context of your customer and how costs are incurred in doing so. Next, you’ll need to have a set of levers to be able to influence the both maintenance and operate activities. Lastly, you’ll need to understand how your customer will make money by using the outcome in order define a pricing model.

In a business model based on title passage and transfer of risk to customer there is a lesser motivation for the supplier to invest in digital and connectivity. The greater the motivation is in an outcome-based model where all maintain and operate risks remain with the supplier. Technology becomes a means and necessity to mitigate those risks.

  • Digital stream lines operations
  • Connectivity creates visibility and transparency

Customers expect things to work

A second reason to invest in digital and connectivity is an increasing customer expectation that products simply must work. This implies two things:

  • Prevent a product from breaking.
  • When it does break, minimise the impact on operations.

Using technology allows us to pre-empt a failure and to minimise the impact of downtime on operations.

In an outcome-based business model both customer and supplier have an aligned interest to ensure availability of the outcome “when needed”. The last two words are essential, because no matter how much you’ll invest in preventing downtime, ultimately any product will break or need maintenance. Thus, it’s the combination of technology and understanding the outcome requirements of your customer that defines the ability to monetise outcomes.

Mutual benefit

With new outcome-based variants in the offing, we often hear the doubt: “What happens when the outcome is made available by supplier, but it’s not utilised by customer”. 

For nearly two decades we are familiar with the copying machines example where you pay per copy. Over the years copier companies have perfected their outcome-based model with their customers to mutual benefit. The mechanisms they have created:

  • Provide consultancy and software solutions to make better and more usage of the deployed copying machines.
  • If utilisation goes up, the copying machine is replaced by a larger model and the former model is deployed at customers with a smaller demand.
  • Use price breaks and contract duration to cater to customer cost predictability expectation. 

Going back to our own examples. An airline buying power-by-the-hour has a genuine interest to fly the planes. A building owner buying pay-per-lux or refrigeration can only last when having tenants. If you can find the right driver to bill your outcome, outcome-based services are the way forward. In the end we want to use products. We need medical equipment because we value life. We require construction equipment because we need buildings to live and work. We need transportation means because we want to travel. Looking forward, the Gartner prediction may be conservative.

[i] Insight into Asset Lifecyle and Total Cost of Ownership – Accenture 2012

[ii] Critical Capabilities for Field Service Management, Gartner 2019 – G00436216

[iii] Anticipating the Information Needs of the Chief Revenue Officer in 2023, Gartner 2012, G00239551, 

3 Reasons Why Results Matter More Than the Product

Increasing machine uptime is at the core of what we do for our customers. We know that more than anything, our customers rely on machines to be online and fully functional in order to deliver results. From the small parts that make up a gamma ray machine to the pipe used in oil extraction, each part contributes to the general function and health of a machine. When the focus of service shifts to outcomes, it is not the value of the product/equipment that drives the equation. Even small and inexpensive components such as a pump or valve may have a tremendous impact. Service is a key component of a machine’s functionality, regardless of the size of the component, and as an organization we are laser-focused on minimizing unplanned downtime to ensure machines deliver positive results.

This perspective is driven by the need for tangible results and marks a tremendous shift in the industry we’ve witnessed over the past couple of years to outcomes over products. An outcomes-based model is where manufacturers focus on selling outcomes of a particular product rather than selling the actual product. For a solar panel farm, for example, the outcome is hours of energy created. Service teams and service providers will someday operate according to this model: instead of promising reactive repairs, service organizations will be responsible for ensuring that equipment is consistently delivering a valuable outcome by maintaining it proactively. Essentially, both the manufacturer and the service providers will be laser-focused on one thing: tangible results.

Here are three reasons why results are more valuable than the product itself – hint: it has to do with their value add past the point of sale:

  1. Uptime Has a Direct Effect on a Company’s Bottom line: Equipment can have every cutting-edge capability in the world, but unless that machine is running smoothly and consistently, it isn’t contributing to company productivity. Like an old consumer appliance that sits stagnant collecting dust, equipment plagued by repairs and downtime draws valuable resources away from the company mission, whether that is to serve patients or facilitate renewable energy sources.
  2. Steady Streams of Revenue: In an outcomes-based model, OEMs have the opportunity to continue providing service well past the point of sale, generating a regular cadence of income for the entire machine’s lifecycle. Since the goal is not only machine uptime but machine output, a product never leaves the cycle of service. Many companies already have service contracts in place which ensure a schedule of service in return of a regularly billed fee.
  3. Customers Value Results, and So Should You: Delivering memorable, superior customer service alongside your product offering is pivotal in customer retention, service delivery, and contract renewals. A company who delivers outcomes and always-on machines differentiates themselves from competitors by providing their customers with more than reactive repairs. Customers are receiving more than machine repair, but peace of mind and the ability to rely on projected bottom lines. In the end, this is a less risky, and more valuable model of service.

Each of these key reasons proves a central point: the future of field service is only as strong as the outcomes it produces. And as the industry moves towards an outcomes-based model, machine uptime, productivity and efficiency becomes a meaningful reality down to each and every small part.

This article is published in ServiceMax Field Service Digital on July 31st, 2018

Are Service Metrics the New Economic Barometer?

For decades the OECD[1] has been reporting a global productivity decline, while at the same time we see a rise in GDP. This triggers the question: Should the productivity metric should be augmented with more contemporary metrics in policy making and business decisions? Today we see the disruption of anything-as-a-service business models. Its success is powered by underlying service metrics.

Where productivity predominantly focusses on the efficiency of producing a product, service metrics focus on how that product is being utilised. Understanding and optimising a product’s use creates new revenue streams boosting our economy.

Responding to Volatility

Service metrics have been around for decades, only to gain more traction as other metrics fail to paint a complete picture for decision makers. Decision makers face a volatile environment with rapidly changing customer behaviour and technology. Today we must explain to customers that apart from selling an excellent product, we provide services that enable the end user to drive value from that product. Instead of the product being the goal, the product is a means to an end. More and more we’re moving towards buying the outcome of a product over owning the product.

“Velocity and scale of adoption are coming faster, making service metrics (availability, uptime, reliability) strategic to growth & success1.”

After-Sales Has Always Known

Initial product purchase relative to total product lifecycle cost

Research from Accenture[2] shows that between 8 and 12% of the life cycle cost are related to the purchase of a product. The rest of the costs are incurred during the operational phase of a product. It is typically the after-sales department that provides services during this phase. In doing so, after sales has many touch points and has a pretty good idea how the customer is using the product. In performing the services throughout the product lifecycle, after-sales generates many service metrics. The big opportunity is to use these metrics beyond the operational aspects of delivering the services.

Maturing of Service Metrics

The effectiveness of service metrics depends on the maturity of your service organisation. If you only provide break-fix and spare part services in a reactive mode, the available metrics will have a lesser potential to influence your business strategy then when selling output/ outcome-based services. For the latter, having a thorough understanding of all cost and revenue drivers is essential. The common demeanour is that service metrics drive new insights and those insights can be turned into new revenue opportunities. Zeithami[3] et al illustrate in their continuum how your services portfolio will change when maturing and shifting the focus from product to its use.

Zeithami continuum

Installed Base Penetration

Let me illustrate the maturing of a service metric and its impact on your business model. Does your organisation know where products go after they have been sold? Do you keep track of reactive and preventive maintenance activities per installed product? Do you keep track of modifications and retrofits to installed products?

When you invest in installed base understanding and connect the dots with all activities that relate to the installed product, each iteration you generate more insights to do the job better, faster and cheaper. As a result, you build trust and satisfaction with your customer. In return, the customer will tell you more about his business and how you can create more value by means of offering more and upscale services. The more you are connected to the dynamics of your customer, the more reliable your economic barometer.

From Data Consumer to Data Supplier

What you see happening in the example of installed base penetration is that after-sales is transitioning from data consumer to data provider. To deliver basic services, after-sales builds on product related info such as the as-built and warranty clauses. In delivering services, after-sales collects data on the usage of the product creating a wealth of insights from the as-maintained. The insights created from service metrics can feed both product development and market development, resulting in better products and relevant propositions driving sustainable economic growth.

Outcome Economy

On sustainable economic growth, the World Economic Forum[4] describes the outcome economy as a phase where “companies will shift from competing through selling products and services, to competing on delivering measurable results important to the customer”. This requires “a deeper understanding of customer needs and contexts in which products and services will be used”. Service metrics cater to this deeper understanding of both product and customer behaviour. It is technology, digitisation and state-of-the-art field service management tooling that drives the maturing of service metrics in both scale and real-time. Having this data at your fingertips supports situational and holistic decision making. In other words, product related services for commodity buyers and outcome-based services for value buyers.

Service Metrics as an Economic Barometer

Whether it is the maturing of the after-sales domain or the customer shift from owning a product to generating value of its use, service metrics are at the heart of both. The dotcom revolution has shown us that productivity does not have the same relevance in the automated, servitised Industrial Internet business landscape. Today, we live in a data driven economy. He/she who masters data has a competitive advantage. Service Metrics play into that game.

“It’s about unlocking data to turn valuable insights into powerful business outcomes[5].”

After-Sales Paradigm Shift

After-sales traditionally has not been a business function with a voice in strategic decision making[6] – despite contributing significantly to the margin of the organisation. With the growing value of service metrics after-sales has the potential to become a provider of valuable and strategic insights. This is a paradigm shift for the entire organisation. Productivity has its place, but pay attention to the service metrics as an economic barometer.

This article is published in ServiceMax Field Service Digital on January 8th, 2020

[1] OECD Compendium of Productivity Indicators 2017, ISBN 9789264273252

[2] Accenture 2001, Equipment Today, Service Tomorrow – the total cost of ownership vision

[3] Zeithami, Brown, Bitner and Salas 2014

[4] World Economic Forum – Industrial Internet of Things: Unleashing the Potential of Connected Products and Services 2018 – Chapter 3: Convergence on the outcome economy

[5] GE Digital strategic focus 2018, Bill Ruth

[6] VansonBourne 2016, The challenges, benefits and future opportunities of field service management

After:Market 2017 – Unleasing Service 4.0

Last week 250 service leaders attended the 11th edition of After:Market in Hamburg, Germany. For a number of years, I’ve chaired this event and presented keynotes. Over the years I’ve seen a change in dynamics both in attendants and topics covered. Not only is aftermarket reiterating its value contribution, aftermarket is also positioning itself at the core of business transformation.

To my great pleasure a growing number of attendees is having job titles like business development and sales & marketing. This year even procurement was present. The sheer observation that other functions are having an interest in service is the equivalent of “likes” on social media. The buzz is out. Service people knew that they mattered, now other functions are recognizing it.

Amongst the participants I detect a drive to unleash service on two levels:

  1. Doing things right – Daily many service people keep our assets afloat and take a pride in helping customers. To keep up with the pace of technology advancement and customer expectations, many service executives are shopping for state-of-the-art tooling.
  2. Doing the right things – Having all the data and touch points in grip, there is a realization that service is sitting on top of a gold mine to adapt/ change the business model. These service executives are shopping for how-to-get-buy-in handles. 

In my presentation “what service manager should know about sales” I mentioned a window of opportunity to initiate business transformation. If your it is the goal of your organization to grow your business rather than increasing sales, then service can lead the discussion by role playing a product-focus-scenario versus an outcome-based-scenario.

During the networking breaks and social activities, you can feel a common sense of direction. Service is working hard to get its act together on the basics. At the same time service is preparing for that opportunity to contribute to and drive the new business model.

At After:Market many speakers have shared their take on servitization, service design, product-as-a-service, digital, IoE and event procurement-psychology. Great and inspiring stuff. Especially when you tie it all together to create momentum to start your own transformation journey.

I’m looking forward to next year’s edition … and to hear from you how you have applied the insights in your organization.

This article is published in ServiceMax Field Service Digital on November 1st, 2017