Identifying new revenue streams in Service

It is no big secret that service revenue streams are profitable. Thus, it is to be expected that many CFO’s are the driving force behind your organisations’ service revenue growth ambitions. Especially when margins on product sales are dwindling. And indeed, we see the majority of today’s CSO’s having a revenue target. This is where the real transformation starts.

Having a cost-centre heritage practically all CSO’s know how to drive cost reductions in the service delivery process. Ask those same CSO’s if they know how to grow revenue, and the answers are less clear. Read on for the missing insights.

A small personal anecdote. In 2012 I was responsible for selling service contracts for a division of a € 60 billion family-run German company. Because my targets were revenue based, my role was moved from the service domain to the sales domain. The CRO asked me how I would achieve my goals and what marketing budget I needed. I said I would first build the delivery capability and then go for the marketing budget. How naive I was.

Voice of the Customer

How could I know what capabilities to build without understanding what customers really value? Without ever having put a lot of thought to my current services portfolio my service revenue stream was more a bookkeeping metric than a conscious business driver. Looking at my website under the services heading I saw the usual suspects; installation services, periodic maintenance, spare part sales and a helpdesk for break-fix scenarios. Remembering the words of the CRO; how did I market these offerings? Well, beyond the website, I didn’t. It made me aware that I needed the voice of the customer.

Customers expect assets to work

And when I asked, the answer was really simple; customers expect their assets to work. They want to maximise uptime while at the same time minimising operating cost.

The Preventive Maintenance story

May I make a guess? Preventive maintenance is a significant portion of your service revenue stream. But what if your customer starts questioning your rationale of ‘preventing’ and how those activities link to the achieved uptime? What if the procurement department of your customer pressures you to reduce the maintenance cost?

In our previous blog on how to sell customers on the value of preventive maintenance we have shown that value recognition of service delivery is moving from the actual execution to the insights you can provide. Sure, the service work needs to be done, but beyond fixing the asset, you have to ‘fix’ the customer. So, if you perform a periodic maintenance, try to shift your focus to the reporting and the interpretation/ communication of what the outcome means to the customer.

A customer may respond with:

  • Did you find any anomalies during PM and what impact do those have?
  • Do I need to reserve any additional budget to keep the asset going?
  • How can I improve the performance of the asset?

From fixing what breaks to knowing what works

Beyond reactive services

Considering revenue streams based on reactive type services are in jeopardy, the way forward is offering services that focus on the output and outcome of the asset. This implies that you have to change your paradigm from a product focus to a customer focus. At the core of your service delivery is not the product, but how your customer is using it. It makes a big difference if the same product is used intermittently at a 25% utilisation versus a 24/7 usage at 99.x%.

The key to selling uptime and performance-based services, is your understanding of the ‘cost of downtime’ of your product in the context of its use. Thus, we’re back at the voice of the customer.

I love penalty clauses

A ‘great’ way to engage in a value conversation with your customer is the topic of penalty clauses. I love them! Not because I, and my CFO, like to include the penalty liabilities into a service contract, but because penalties are a surrogate for something that is important to your customer. Try to discover the ‘why’ behind a penalty clause and focus on the mitigation of that reason. You may discover new types of services you can sell. 

My guess, it’s all about availability of the machine. Apply more curiosity and your customer will tell you when that availability matters … and when not. Even a 99.x% utilisation will have ‘black out’ windows allowing you to perform the necessary service activities without the stress over-dimensioning your service delivery organisation.

Sell first, then build delivery capability

Going back to my CRO. On a continuum of potential services, I could offer a full range from reactive to pro-active, from product to usage-based services. In the end, the determining factor is not me, the seller of the services. It’s all about the buyer of services. My CRO ‘cured’ my naivety. I first listen to my customer and sell what he/ she wants. Then, if I have a state-of-the-art and flexible service execution platform then I do not need to worry about the service delivery capability being able to catch up.

Finding Revenue Leakage in your Service Business – part 2

Do you know what your maximum service revenue potential could be based on the product units your organisation sells? Is your current service revenue less than this maximum? And, do you have a process to upsell service contracts into your existing installed base? One or more puzzled looks, chances are big you are suffering from Upsell-leakage. 

In the previous episode we have defined two types of leakage; Contract and Non-Contract leakage. In this episode we’ll define Upsell-leakage. Most likely upsell leakage will be twice as big as the other two combined.

Upsell leakage

As service organisation you’d like all your customers to buy your premium service. Some customers will buy ‘gold’ service level for their installed base, others will be happy with ‘basic’ service. It all depends on the use case of your customer and their propensity to value the services you offer. As use cases tend to change over time, you may want to consider setting up an upselling program using the touch points from your service delivery. 

If you don’t ask, you don’t give them the opportunity to say yes

Not having such a programme deprives you of revenue potential; being the delta between your current service revenue and ’gold’ service level.

Defining the upsell service revenue potential

To quantify upsell leakage we can use a mechanism known to Sales as TAM (Total Addressable Market). Suppose you sold 1,000 units at $10,000 each. Suppose a ‘gold’ service contract has an annual selling price of 12% of the unit selling price. This would put your service-TAM at $1,200,000 per annum.

Imagine your service department has 600 of those 1,000 units on their radar screen. The rest is sold via an indirect sales channel and/ or lost-out-of-sight. This gives an installed base visibility of 60%. Let’s assume those 600 units generate a service revenue of $400,000, split across:

  • 10% of units are in (OEM) warranty and don’t generate revenue (yet)
  • 50% of units have a bronze, silver or gold contract generating $240,000
  • 40% of units don’t have a contract and generate $160,000 in Time & Material (T&M)

With the above figures you currently reap 33% of your service-TAM and you have an upsell potential of $800,000. Monitoring this upsell leakage metric should give you the incentive to put a revenue generation program in place.

Metrics driving upsell leakage

In the numeric example we’ve touched on three metrics that impact and drive upsell leakage.

  • Installed base visibility: it all begins with installed base visibility. Units not on your radar screen will not contribute to your service revenue! This is easier to manage for units sold via your organisation’s direct sales channel, though it does require an effort to manage the life cycle from as-sold to as-maintained. For units sold via the indirect sales channel you’ll have to exert extra effort to get access point-of-sale data, maybe even ‘buying’ the data.
  • Attach rates: both warranty and contracts are attached to the unit, thus driving attach rates. Attach rates are ‘boolean’, they say something about having an attached contract, not about the amount of revenue you get through that contract. Attach rates start at the installation/ commissioning date of a unit. Either Sales makes the attached-sale at point-of-sale of the unit or the Service department drives the attaching post-point-of-sale. Driving metric for Service is to maintain a continuum of attachment throughout the life cycle of the unit. 
  • Service revenue contribution: Within the subset of attached contracts you’d like to have as much revenue contribution as possible, ‘gold’ service being the holy grail. Per service contract you could have any of the following revenue contributions:
    • OEM Warranty: 0% of Service-TAM
    • Enhanced Warranty: 33% of Service-TAM (only the on-top-of OEM warranty piece)
    • Extended Warranty or Basic service: 67% of Service-TAM
    • Gold: 100% of Service-TAM

In terms of merchandise, you can’t force anyone to buy something

Remedying upsell leakage

The overarching paradigm to growing service revenue is twofold: increasing your installed base visibility and making sure you have attached offerings to those units. 

Getting visibility on units sold via the indirect channel is slightly more complicated, but once you quantify the associated service-TAM with those units, you may have the ‘funding’ to ‘buy’ the data. This may even lead to revenue sharing models with your channel partners.

The last piece of the puzzle is using the visibility of the upsell leakage gap whenever you have a touch point with your customer. Note that the original (service) contract has been drafted many months ago by people whom are further away from the business, who could not 100% envision the service reality of today. You thus may end up in an entitlement conversation where the customer has an urgent requirement whereas the contract ‘only’ covers for the ‘basics’. The delta is an upsell opportunity. Either resulting in an upgrade of the service contract or maybe only upgrading an incidental work order. In case the latter happens more often, you have the data points to convince the customer for the former.

Now, understanding that upsell leakage is potentially twice as big as contract and non-contract leakage together, you may have found your compelling reason to start another revenue growth project.

Finding Revenue Leakage in your Service Business – part 1

Have you ever had to Credit or Discount an invoice? If the answer is ‘yes’ then you have leakage, if the answer is ‘no’ then you definitely have leakage.

How do you respond to the Aberdeen finding that best-in-class companies have a whopping 14% warranty & contract leakage? Denial, absurd, overstated, or … wait-a-minute, maybe I’m not looking at the right KPIs to detect leakage. Once you acknowledge leakage exists in your organisation, wouldn’t you go all the way to manage leakage out of your business, knowing it has a direct impact on your bottom line?

Defining leakage

What is service leakage? In the simplest terminology: you are losing money. And the bad news is that it often happens without you knowing or realising it.

We can distinguish two types of service leakage:

  1. Non-Contract leakage : the periods in the operational life cycle of an asset not covered by warranty and/or a service contract (sometimes this is also called T&M-leakage because service outside a contract classifies as T&M).
  2. Contract leakage: an asset is covered by warranty and/ or a service contract but in your service delivery you provide more and/or a higher level of service than the customer is entitled to. 

Contract leakage typically occurs when service organisations do not know and/or manage expiration dates of warranty and contracts. Non-contract leakage typically occurs when the entitlement process is fragmented and/ or when the information is not accessible to all involved service actors.

Let’s mention a couple of common scenarios:

  • A customer claims a defect within the warranty period. You correctly entitle the job as ‘warranty’. On site the technician detects ‘customer induced damage’. The technician performs the repair anyhow and there is no charge to the customer.
  • A customer is entitled to next day service but presses you to fix the machine today without paying an additional fee. Because your technicians are not busy today, you give in to the request.
  • A customer makes a service request assuming the current contract is still active. Upon entitlement check you detect it has expired three months ago. The customer agrees to renew the contract per current date. You incur 3 months loss in contract revenue.
  • A customer has multiple machines of the same model. Only one of them is covered by a contract. The single contract line is used to entitle work on all of them because the customer always uses the same serial number.

Service Leaks are not the problem; they are the symptom. They reveal a disconnect between process design and actual behaviour. Denial of leakage increases the disconnect.

Impact of leakage

One of the unfortunate things in business is that the cost always hits you – now, if you are so good at capturing cost why do you allow revenue to slip through your fingers? How do you think your shareholders would enjoy hearing that you worked on a customer’s asset and neglected to bill them? 

Another way to look at the impact of leakage is to establish how much extra revenue would need to found above and beyond what you are already billing for. Let me paint a picture for you, as we have established you capture all of your costs so any leakage (missed revenue) that you capture will have a 100% positive impact to your bottom line – every dollar billed will be a full dollar of equivalent gross margin. So, let’s say you were running at 20% margin as a service organisation and you allowed $100,000 to leak through your service organisation, now a service org would need to go and find $500,000 of brand spanking new business to offset this $100,000 leakage just to break even. How hard is it for a business to find $500,000 of extra revenue with the same resources? 

Actually, quite easy – set your system up to minimise the risk of leakage….

On top of the cost, revenue and margin contribution impacts, customer expectation is a big one. Leakage has a very large behavioural component. If a customer is used to getting service for free, it becomes very difficult to start charging for it. If a customer ‘discovers’ you can’t manage your entitlements correctly, this may lead to ‘unwanted’ service calls.

A similar behavioural impact can be expected on the technician’s end. A technician chose his job because he/she wants to fix things and be a hero on site. A technician did not select the job to do admin and become a contract-referee. Thus, if you do not empower your technicians with the right tools and information, do not expect any cost/revenue sensitivity, they will go for CSAT and please the customer.

Finding leakage

Do you find leakage or is it a matter of ‘capturing’ it? You are delivering all of the services that create the opportunity for leakage, so you already know where it is, you just need the correct tools to capture it, Oh and by the way,  they are never humans and excel… You need a robust process and a software solution to support that process and remove ‘chance’ from the equation. 

Detecting, quantifying and finding the origin of leakage in your organisation is a process like remedying a leaky roof. You’ll need adjacent ‘instruments’ to find the source.

Remedying leakage

The first step towards remedying leakage is accepting its existence. Once you have made leakage visible, you can start actioning it. And in general those actions fall into three categories:

  1. Stop delivering free service; this has a direct cost reduction benefit.
  2. Continue delivering ‘free’ service and start charging for it; this will increase both your revenue and your margin; the additional margin is 100% as we have shown you have already incurred the cost.
  3. Continue delivering ‘free’ service and use it as collateral for something else of value; this benefit is harder to manage, but we can argue it is good for CSAT and can be used during contract renewal to counter cost & rate reduction arguments from your customer.

This article is published in ServiceMax Field Service Digital on November 10th, 2020

The role of service in the Experience Economy

In the Experience Economy, customer service means more than fixing what’s broken. Coen Jeukens of ServiceMax explores what this means for service organizations.

In my native Dutch language, we have an expression “operatie geslaagd, patiënt overladen,” which translates to “surgery successful, patient deceased.” Just because a procedure or process was performed successfully does not necessarily mean it generated a successful outcome. That’s because experience matters.

The ‘Experience Economy’ is a phrase first coined in 1998 in a Harvard Business Review article and later in an eponymous book by consultants Joseph Pine and James Gilmore. It’s based on the premise that businesses must deliberately orchestrate and create memorable encounters for their customers, and that the memory itself becomes the product — or in other words, the ‘experience’. Airlines for example, are not just taking you from A to B on time and at the lowest price, but (hopefully) giving you their distinctive en-route experience.

Valuing the experience in service delivery

The ‘Experience Economy’ states that over time the value of the experience will outweigh the value of the product or service. The implications for service delivery — fixing the product alone — is not enough. You need to ‘fix’ the customer as well.

It’s particularly relevant in service-based industries, because more advanced experience businesses can charge for the value of the ‘transformation’ that an experience offers. But a lot has happened since 1998 and the lines have since blurred. Experience is now intertwined with customer management strategies and more recently the move to outcome-based business models and the rising emphasis on customer success.

To help us measure customer satisfaction, Fred Reichheld introduced the Net Promoter Score (NPS) in 2003. Today you see NPS, CSATCES and CX everywhere. We care about the customer because the product/service itself is moving towards becoming a commodity. To differentiate and assure ourselves of sustainable revenue streams, we need to move upwards. We need to do what customers really care about. This drives many transformation journeys.

From break-fix to knowing what works

For service organizations, this means moving from fixing what breaks to knowing what works.

For example, a global technology solutions vendor had a persistent problem in finding sufficient qualified technicians. As an experiment they started hiring hospitality graduates. Their logic was that with modern tools, it’s easier to teach technical skills to people-oriented employees, than to teach people skills to technology-oriented employees. In other words, you hire for attitude and softer skills, then teach the technical competency. With increasingly vocal customers this experiment not only became a success for the company, it also became the norm.

As industries become increasingly automated we are rethinking the skills our workforce needs. The role of service technicians in delivering positive experiences, human touch, contextual understanding, communication and the slew of softer skills aside from the service or maintenance task, is becoming more important than ever.

As the economy begins to emerge from locked-down restrictions to finding a new level of ‘normal’, customer experience will be the bedrock of service delivery, customer retention and proactive customer management strategies.

Published in Diginomica on July 1st, 2020.

Why Asset Centricity Matters

When you communicate with your garage to service your car, what is the first question they ask? Do they ask your name, or do they ask your license plate number? This is at the core of asset centricity. The asset is tracked throughout its life cycle to drive cost efficiency, revenue generation and customer satisfaction.

Know thy Installed Base

One of the first questions we ask to any organisation is what level of visibility they have on their installed base. Do you track your products/ equipment assets beyond point-of-sale?

The rationale is simple. If you want to be efficient in service delivery, you need to know where the asset are and in what state. If you want to drive revenue and satisfaction, you need to know how your customers are using the assets and why those assets are important to them in their operations.

If you don’t know your installed base, your actions will be ad hoc and be at the mercy of tribal knowledge of the people serving that customer.

Schneider Electric transformed their business model from ‘sell and forget” to “sell and service” growing their installed base visibility from 10% to 35% driving service revenue by 11% YoY.

<Insert link to Schneider customer reference>

Recognise the asset

You may know the customer, but if you don’t know the asset you may make the wrong decision. This is illustrated in the entitlement process. Entitlement is the gateway to cost control, revenue increase and customer satisfaction.

  • Leakage: provide service on an asset without warranty and/or contract
  • SLA attainment & CX: over/ underdeliver on customer expectation
  • Attach rates & revenue: miss an opportunity to cross and upsell
The role of Entitlement in Service Execution

Often, we hear organisations say that their knowledge about their assets is not yet at a level to perform a reliable entitlement process, resulting in a lot of corrective actions post work order debrief. Have a look at the Schneider electric video, collecting and validating asset data is a journey.

Tip: if by improving technician productivity the ‘saved’ time does not constitute an extra job per day, you can use the time to take inventory of the installed assets, its state and its surroundings.   

Know the asset

You might know the technical details of the assets you produce. Your maintenance manuals may prescribe what to do under nominal operating parameters. But what do you about how your customers are using the assets? Some may be ‘sweated’ and run at 99% of capacity. Others may be used occasionally only.

Having knowledge about how your assets are being used by your customers is an essential piece of information to define the right action. It will put the service request in context, help in the entitlement decision and support the triage process. It will give your customer the feeling that you’re providing contextual solutions.

Manage the asset

In the car example of the opening paragraph, the dealer focusses on the asset. The asset has a life cycle. In each phase of the life cycle different service and maintenance activities need to be executed … in combination with the usage profile of the asset.

The car may be purchased/ leased by owner A. After a number of years, the asset may transfer to owner B. If the maintenance history would be tied to the customer record, the data would be lost under ownership B. Thus, the reason why more and more organisations adopt asset centricity for life cycle continuity.

This continuity is extremely important in regulated industries. If any time in the life cycle a quality or compliance defect is detected in a series of assets, then you would like to have the opportunity to search an asset centric installed based, instead of sending messages to the owner who did the initial purchase of the asset.

Asset centricity allow you to manage your field change orders effectively. Asset centricity allows you to manage mid-life upgrades. Asset centricity is an equally powerful paradigm as customer centricity. Try to merge them into your business operations.

This article is published in ServiceMax Field Service Digital on April 14th, 2020

Selling Preventive Maintenance as a Value Add

Selling preventive maintenance is not what it used to be. In the old days a manufacturer could use its expert position to prescribe a maintenance scheme. Today, a combination of emerging technologies and pressure from buyers to do it cheaper/ smarter warrant a revisiting of the value proposition of preventive maintenance.

PM = Periodical Maintenance

As acronym we use PM. When talking we utter the words preventive maintenance. But what do we really mean?

  • Planned Maintenance
  • Periodical Maintenance
  • Predictive Maintenance
  • Prescriptive Maintenance

Analysing a lot of service contracts offered by OEMs we still see most of the maintenance is periodical or counter based. Just like the maintenance interval for your car; a PM each year or at 15,000 km.

All those periodical or counter based maintenance jobs are good service revenue for your service organisations But what happens when customers start challenging you? What if the customer has access to knowledge that amends or contradicts the engineering assumptions that led to the definition of your current maintenance intervals?

Buyers seek to reduce maintenance cost

In a world where people are more vocal, we see customers expecting things to work and buyers seeking to reduce maintenance cost. These expectations impact the way we sell service contracts. 

Selling is more straight forward when you can see a direct relationship between the pain and the gain. Such a link is obvious for installation and break-fix activities. But it is less apparent for preventive maintenance. Try to picture buyers asking these questions:

  • What does PM prevent and what is the risk that remains?
  • What is the rationale of the current maintenance interval?
  • Nothing happened last year. What will happen if we skip or delay a PM?
  • Can you dissect the PM job in activities (show me what you do) and is it really necessary to have all those activities done by an experienced/ expensive technician as yours?
  • Can we do pieces of the PM job ourselves?

You get the gist of the conversation and know where it is leading  less cost for your customer at the expense of less PM revenue for your service organisation.

Problem-Fix curve

What complicates the selling of service, is that in most scenarios the buyer and the customer/ user are not the same person. You may convince the user of a piece of equipment to do preventive maintenance, the buyer on the other hand has a different set of objectives. Most likely the buyer will push you on a path towards commoditising and cannibalising your PM services. All in order to reduce cost.

Rediscovering value

To stay ahead of the game let’s dissect PM along the lines of value creation for the customer. High level you can split a PM into three pieces:

  1. The execution of the maintenance activities
  2. The reporting on those activities
  3. The communication and interpretation of the results

Ask your customers to rate the value of each of those pieces. It’s probable that you will find that the business value of PM to a lesser extent is in the execution and more in the reporting and communication.

Maybe you pride yourself in your uniqueness of execution, whereas the customer might perceive it as a commodity. If also reporting and communication are on par, you may face price erosion.

If your customer needs the PM report for compliance or insurance purposes, the value of the report increases. When you consider that PM is often a play of risk and liability, you can price the value of your brand. Example: It does make a difference to an insurer if a yearly PM/ inspection is performed by a triple A company or a middle of the road company.

Communication value comes into play when your customer expects you to be a partner rather than a supplier. 

  • Supplier – “just send me the PM report, I’ll read and interpret it myself. When I need assistance, I’ll contact you.”
  • Partner – “help me interpret the findings and consequences of the PM. How does this impact my business?”.

In the latter situation you can monetise the communication beyond the effort of having a conversation for a couple of hours. PM can thus elevate from an obligatory periodical execution to an instrument of customer satisfaction and cross- and upselling.

Repackaging the preventive maintenance offering

In order to retain and expand your PM revenue stream in a context where the buyers move to reduce their spend, do go in discovery mode and (re)define preventive maintenance. PM is not a singular black box once defined by somebody in engineering with a product focus. Modern PM is a menu of choices (and consequences) for your buyer based on the usage profile of the product, budget and risk.

This article is published in Field Service News Jan/Feb 2020 issue.

Battery Gate

The dust is settling over Battery Gate. I’ve heard many woes and seen people in disbelief. Is this really happening? Is a mobile phone the only product affected? Social media exploded with conspiracy theories and various law firms have started class actions. What can we learn from Battery Gate?

AppleNews

Sales and After-Sales

A relationship between Supplier and Customer starts with an initial sale. With array of tools Suppliers bid for repeat purchases:

  • Dazzle them: Brand/ customer loyalty
  • Force them: Technology/ customer lock-in
  • Convince them: Maintenance & Value-added Services
  • Help them: Operate & Ease-of-use Services

In the case of the phone we can see multiple types of product related repeat purchases:

 RevenueWhen
New phone$999.00In x years
Extended warranty$199.00Point of sale
Battery replacement$79.00Approx. after 2 years

In this example the supplier drives its revenue figures through product sales and has little incentive to lengthen the life cycle of the product. After-sales revenues even jeopardize future product sales. 

Many OEM’s/ Manufacturers will find themselves in exactly the same position: after-sales revenues are a welcome addition to sales revenues as long as they don’t compete.

Doing the right thing

So, what is “doing the right thing”? In case of Battery Gate consumers got the impression that the supplier was purposefully reducing the product life cycle, thus forcing earlier product repurchases. We’ll probably never know all supplier considerations in their course of action, we do know Battery Gate back fired … to a certain degree. Analysts predict that the supplier may see “mild headwinds” (see inset).

When considering “doing the right thing” from the customers perspective, the concept of Total Cost of Ownership (TCO) could come into play: the optimum of both the initial/ capital sale and the operational expenditures throughout the life cycle.

Does this mean we would rather buy a phone with a longer life span and user replaceable parts? I guess here we must make the distinction between “needing” and product and “wanting” a product. If you want the new functions and features you’ll probably forgive the supplier. Your repeat purchase will be the next product. If you need the product to generate output and outcome for your organization, you’ll drive your supplier, or third-party maintainer, to deliver after-sales services.

Loyalty

Would a Battery Gate in your industry impact your NPS and revenue stream? Would the headwinds be negligent, mild or violent? I believe being honest and transparent is your route to loyalty and repeat revenue.

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.

Product as a Service

When we need light, we buy a bulb. When we need a hole, we buy a drill. It is so engrained in our thinking to own products whilst we actually need the outcome. More and more we see upstart businesses cater to this “new” demand. They sell a product as a service (PAAS). How are you preparing your organisation to sell your product as a service?

“We move water”

At the After:Market 2016 event in Wiesbaden a German manufacturer of pumps introduced his company with the words “we move water”. With those simple words he set the stage for his PAAS business model. Selling the pump is not his goal; it is a means to start an outcome-based discussion with his client. In doing so he enters in a conversation where he truly understands what drives his customer.

“If you make a fantastic long lasting products, how do you earn money when the market is saturated?”

Because the conversation goes beyond the pump, he has created a new business model where he earns money with moving water. The additional benefit is for the environment. Instead of designing your product for repeat sales you will wind down a track where you deliver outcome at a minimal material/ energy footprint.

Transforming legacy business is possible

Understanding the effort it takes to transform a legacy business, University of Cambridge professor Andy Neely asked the panel of the Field Service Summit 2017 in Warwick what successful transformation examples should encourage others to follow suit. Both Boeing and Philips demonstrate you can have best of both worlds. They serve customers in a hybrid model. Via one business unit customers can buy the product in a legacy CAPEX/ OPEX mode. Via another business unit customers can buy the output/ outcome of the product. Depending on his propensity, a customer can choose between a jet engine and a “power by the hour” propulsion solution or a bulb and a “pay per Lux” illumination solution.

“Do you need a bulb or are you in need of light?”

Dialogue inset is a freely edited transcript of VPRO Tegenlicht documentary “don’t own, enjoy” November 8th, 2015 (Dutch). A variant of the message in English can be found here.

Why should you explore PAAS

It may scare corporate executives and sound very blunt but exploring PAAS is a “do or die” message. If you don’t do it, somebody else will. At best it is your current competition and you can see it coming. For the worst, you will face competition from newcomers starting with a clean slate.

Record labels were so focussed on holding to their CD product revenue stream and deliberated so long on legal download options, they were decimated by services like Spotify.

How do you assess your organisation?

“Products are meant to deliver a solution.”

Using a more positive approach: the more you understand how the outcome of your products generates value to your customer the more you establish yourself as long term partner in both a profitable and sustainable way.

Where to start

In the example of Philips Lighting, a small team beyond the radar of product based business model executives designed the “pay per Lux” solution. Upon demonstrated success with a launching customer the new PAAS solution was put in the spotlight.
Setting up a sandbox environment with servitisation minded people is essential, as you will be in for a paradigm shift:

  • When you sell Outcome there is no title passage of the Product. This means the product remains on your balance sheet.
  • As supplier you will be responsible for and remain in control of all CAPEX and OPEX cost components.
  • You need to understand your customer to define a “pay per use” earnings model.

Understanding cost

In the Philips Lighting dialogue the customer asks for a Design, Build, Finance, Maintain and Operate solution. This DBFMO framework can be used to understand total cost of ownership.

Design and Build lead to the commissioning of a Product. Maintaining the Product safeguards the Output of the Product. Operating the Output provides an Outcome. The Outcome generates Value.

Maintain and Operate are stated in terms of OPEX. When adding Finance services to your portfolio, you can transpose Design and Build CAPEX into OPEX too.

Design-for-Operate

With PAAS the total cost of ownership shifts from customer to supplier. As a result the supplier is incentivised to throw in all his expertise to continuously optimise product, output and outcome.

In order to make pay per use profitable all cost elements of DBFMO need to be designed in unison. Call it design-for-operate. Where design-for-service supplements design-for-manufacturing, design-for-operate augments the former two.

“Business models based on breaking products should not be accepted”

Pay per use

Where design-for-operate drives towards minimising waste and cost, engineering the right pay per use model determines your revenue. This is where entrepreneurship and partnership kicks in.

Pay per use is a bi-directional handshake between supplier and customer that takes it to the next level compared to a typical sales-purchasing relationship. Instead of a cost/ revenue conversation about products and output your dialogue will evolve into an outcome based profit/ value handshake.

Your customer will help you define the pay per use drivers. If you really understand his business and you are confident in the capabilities of your own organisation to generate outcome that makes your customer succeed, your customer will be inclined to enter into a partnership to make you succeed as well. As a result de pay per use drivers will be fair, sustainable and durable to both parties.

Don’t own, enjoy

Ownership comes with responsibilities. Why should a customer have to carry the risk whilst the supplier is the expert in both understanding and influencing risk. A PAAS model is the ultimate form of “back to core business”. The supplier managed DBFMO, the customer uses the outcome to generate value. In return the customer pays for use.

Does pay per use really work for both parties or do words like partnership, fair and sustainable sound altruistic? The IT industry does give us insight into what is to come. Because SAAS solutions are available for consumers as well, first hand experience is changing our perceptions, attitude and decision-making regarding cost and value.

Published in Field Service News issue #xx (July/August 2017 and website

What service managers should know about sales

Service is probably the single largest contributor to an organisations profit margin. Service has the most lasting and trustworthy relationships with customers. Still, in the board it is a sales game. If service wants to lead, it has to understand sales.

In the boardroom

Corporate Challenge
Corporate Challenge

Let us be witness of a business plan review meeting:

  • Exhibit A: our targets are more ambitious than our current performance.
  • Exhibit B: we face increased competition, increased customer volatility and shorter product life cycles leading to declining market share and diminishing attach rates.

Now suppose the CEO invites you, the field service manager, to pitch a solution to this non-sustainable situation. Are you prepared? Will your message and vocabulary resonate with the board members?

For as long as I can remember, field service managers bring a message of reality. About healthy and sustainable profit margins. About attach rates and trusted relationships.

What do you think the sales manager brought forward as solution? A message of hope: “if we introduce a new model, add a new feature or drop the price, we will regain market share”.

“When it comes to choice, a message of hope prevails over one of reality.”

What makes the clock tick?

The ugly truth of corporate economics: it’s all about sales and success is measured in revenue figures. Add to that the sales perception that after-sales does not exist without an initial sale and you know the picking order is set. To complete the picture, factor in mind that most CEO’s have a sales background.

“Sales first, then after-sales.”

Sales targets

Sales is a big numbers game. Product hero’s playing with capital expenditures. Going for the win is putting in a peak performance in a short period of time, balancing effort and reward. Asking sales to include Opex related propositions in the sale does sound altruistic considering that doing so complicates, lengthens and may jeopardise the sale.

What about profitability? In the sales mind-set profitability is not a driver or performance indicator. Not because they don’t care, far from that. Because in most customer organisations the decision making unit for both Capex and Opex are different entities optimising their own silo.

“Profitability, who cares? Certainly not sales.”

Funnelling leads

Sales vocabulary uses words like suspect, prospect, lead and qualification. Elias Lewis has put these words in context in 1898 when he conceived the sales funnel. This funnel is engrained in every sales process. It is in the DNA of sales people to convert leads into a sale.

“What we need? Leads, more leads and qualified leads.”

Qualification

One of the most important steps in the sales process is the qualification of a lead. Here sales balances effort with reward. When service starts feeding the funnel, it is crucial to know the difference between a lead in the eyes of a field service engineer and a lead according to sales.

In the eyes of sales service-leads are a big bag of small peanuts. Converting those requires a lot of effort with small reward. For sales to follow-up on service-leads, those leads need enrichment and qualification.

Window of opportunity

Though the clock ticks sales, typical sales solutions to the corporate challenge fail to reverse declining market share or do so at the expense of profitability. In both cases the course is not sustainable.

This is good news as it provides the opening for the field service manager to come forward with his ideas.

“Growing sales is an operational process. Growing your business is changing your business model.”

Find the right tune

Although ideas have been voiced for many years at field service conferences, they will be new for sales once rephrased in sales vocabulary. It will become a customer touch points game with roles for hero’s and ambassadors. It is the perseverance of sales to get to a customer on board. It is the caring mindset of service to keep a customer happy. It is their joint effort to come up with new business.

“Find the right mix between sales DNA and a service heart to develop new business.”

How will sales react? As long as the field service manager doesn’t gloat over his profit contribution and trustworthy customer relationships … and sales can stay in the lead, then sales will go along.

“Field service managers can lead by following.”

Published in Handy Little Book for service Managers (edition 2017) and website