Ten secrets industrial goods companies can win out

Industrial goods companies that understand the opportunity at hand have turned their service operation into a competitive advantage, and some are achieving a level of true service excellence. They have moved from only manufacturing products to offering solutions, and as a result, they are outperforming their peers in terms of service revenues and profitability.

The Boston Consulting Group (BCG) conducted a benchmarking study of 50 manufacturers of industrial machinery that confirmed the attractiveness of establishing a service business. BCG has identified a set of levers that have proved quite useful in building strong service businesses. These 10 high-return levers will help companies pull to enhance service revenues and profitability. (See Exhibit) Let’s review each in turn.

Define the service business model

The very act of recognizing service activities as belonging to a different business model is a critical first step in defining a service business model. The next step is creating a new value proposition (including determining the customers to serve, the services to offer, and the price to charge) and supporting it with a distinct operating model (how to profitably deliver the new offering).

A global truck manufacturer experienced substantial margin pressure on its product sales in light of new competition from truck-leasing companies. As a consequence, after looking anew at customers’ needs and priorities, the company started offering fleet financing to its longest-standing customers and expanded into fleet management. The latter included not only maintenance but also insurance, gas, and even driving services ― all offered at a fixed price per mile driven, which provided customers full cost transparency. Furthermore, the truck manufacturer created a new organizational unit with its own P&L responsibility to manage this new solution-type offering so as to ensure that the effort would be sustained.

Adopt design-to-service principles

Adopting a “design to service” approach can help maximize the total profit possible from a particular product or customer relationship. Captive original-equipment-manufacturer (OEM) services generate double or triple the margins of licensed or third-party-fulfilled services for industrial goods companies. To generate these healthy margins, manufacturers must inject a service perspective into R&D.

A design-to-service approach also increases the number of customer touch points, as it requires customers to contact the OEM for certain parts and service tasks throughout the life span of a piece of equipment. Done well, this approach raises customer satisfaction and cements customer loyalty to the brand. Done poorly ― through overpriced spare parts or unreliable service ― this strategy has the potential to jeopardize long-standing customer relationships.

Defend and develop the entire installed base

The installed base constitutes one of a manufacturer’s strongest assets, yet most companies don’t tap its full potential. In most cases, there is considerable room to enhance the quantity and quality of after-sale services offered to existing customers. At the same time, many companies don’t have a central, comprehensive view of their installed base. New equipment might be marketed to customers through third-party representatives, and used products might be resold several times over their life span. Some companies simply have not kept track of their installed base ― especially if they have grown rapidly through acquisitions and never integrated their various customer lists. Scrubbing these databases and actively reconnecting with customers can be an easy and quick way to advance the service cause.

A major machinery company offered a line of presses, and after years of selling through value-added resellers, the manufacturer had lost track of where its products were installed. That made it difficult to offer retrofits and upgrades, and the company had become reactive in servicing older equipment. In addition, although the general technician dispatched to a customer’s site might be able to diagnose the problem, a dedicated engineer for the particular piece of equipment and another visit was often required before the issue could be resolved.

By conducting a telemarketing campaign, the company was able to compile detailed data about its installed base. Technicians then paid a visit to most of the operators of its presses, affixing to the equipment a sticker with a service phone number and having low-key conversations with the customers. Service calls started to roll in, and the company was ready with a redesigned set of integrated services as well as with related pitches for upgrades.

Service third-party products

Manufacturers often show a reluctance or outright resistance to providing services to competitors’ installed bases. As a result, this service business is picked up by competing manufacturers or by independent service providers found in sectors such as construction technology, machinery packaging, and engine manufacturing. Yet, servicing third-party products can offer a way to spread competencies to new markets and generate additional revenues.

Consider the case of a building equipment manufacturer that also installs and services its equipment. The company saw a drop in new orders and installations when new construction slowed, so it decided to pursue servicing competitors’ products installed in commercial properties, such as department stores, hospitals, and office buildings. The company built an internal competence center to develop methods for servicing competitors’ products and trained technicians and a secondary sales force.

The regular presence of service representatives at these sites allowed the company to develop strong relationships with these customers. In addition, company representatives were able to gain insights into competitors’ installed equipment, giving them more ammunition to promote equipment upgrades and new services, such as remote monitoring and fault diagnostics. The representatives were also able to have conversations with customers about installing their own products when customers needed major upgrades. As a result, the company generated service revenues and upgrade revenues that were higher by nearly 30 percent.

Sell proactively

Successful service providers do not wait for customers to call. Instead, they initiate contact with their customers throughout the life cycle of the product. BCG’s benchmarking study revealed that selling proactively manages to raise revenues often by more than 20 percent and boost profitability by more than 30 percent.

For example, a leading industrial-membrane maker revamped its sales strategy after experiencing low implementation rates for new service offers. Its revised sales approach ― supplemented by a new incentive structure for the sales force ― started by identifying prospective customers that were over- or under-servicing their equipment or were concerned about complying with regulations. The company customized service plans for those customers, benchmarked their operations, and made recommendations for capital expenditures. This highly targeted approach caused service and new-product revenues to grow substantially.

Employ value ― based pricing

In a service business with profit margins as high as 60 percent or 70 percent, the upside potential of value-based pricing may seem limited. However, by shifting from traditional pricing paradigms (such as cost-plus) to advanced value-based pricing, companies can actually increase both sales volume and margins.

A U.S. OEM took these principles to heart and introduced an advanced pricing model that categorized spare parts according to the three main contributors to its customers’ price sensitivity: competitive intensity, price elasticity, and product life cycle. Setting appropriate markups for each spare-part category on the basis of these factors helped the company offset a double-digit sales decline in the wake of the recent financial crisis.

Build a service factory

Many industrial-service leaders aim to establish a “service factory” by standardizing their offering and their delivery of services. The service-factory approach emphasizes consistent processes, best-practice sharing, and continuous improvement.

Global hotel chains illustrate the benefits of a standardized approach. Travelers can count on finding the same quality and customer experience at every property in the chain, regardless of location. This uniformity rests on consistently deploying the same booking, housekeeping, and room-service processes worldwide. Although an establishment run by a leading hotel chain is not necessarily better than an independent hotel, the chain’s business model is scalable and allows for sharing of best practices and systematic improvement.

The same rigor should apply to standardizing industrial-service offerings. Too often we find that services provided by OEMs depend on the activities of the local head of service rather than on defined, standardized processes. Of the companies in the BCG benchmarking study, only about one-third had optimized their service networks through shared expertise to offer a consistent level of quality.

Establish clear performance metrics

Achieving true service excellence requires fact-based decisions, which in turn call for key performance indicators (KPIs) that are different from those used to monitor a new-product business. Service-related KPIs encompass not only financial indicators, such as service share of revenues and service profitability, but also operational performance indicators, such as on-time delivery ratios, the time it takes to issue a quote, and stock out ratios. The information derived from service-specific KPI dashboards can then be used internally and externally to compare the performance of the service organization across locations as well as with peers and recognized service leaders in other industries.

Empower the service organization

Service businesses within industrial goods companies usually get scant management attention. For one thing, most companies focus first on new products, with services being an afterthought. For another, services tend to be highly profitable, and executives are often satisfied with their current performance level, not believing that there is much more room to grow.

In many cases, though, companies could earn even greater returns by treating their service business as a separate entity that has profit and growth responsibilities. Virtually none of the service champions that we have worked with treat their service business as a cost center or bury it within the new-product organization.

Instill a service culture

Service leaders also are characterized by a strong service culture. They view services not simply as a lever to sell more products but as a key differentiator relative to competitors. This attitude permeates the entire organization, from senior executives to line managers and frontline employees. The cultural change required to get to this point takes time and substantial management effort to accomplish. Nonetheless, it’s quintessential to ensure the other service excellence levers can be sustained over time.

It helps to break up the challenging task of changing the culture of an organization into small, tactical steps. For instance, service executives should have veto rights, or at least strongly considered viewpoints, across the chain of product development and manufacturing. The same applies to the compensation of service employees, which should be on par with their new-product counterparts.

As industrial goods manufacturers face pricing pressure on the product side and tight spending by customers, well-run service operations provide a renewed source of profitable growth. By striving for excellence across all areas of their service business, industrial goods companies can reap significant financial rewards and improve their relationships with their customers, killing two birds with one stone.

This article was provided by BCG.