Customer Lifecycle Management Changing Business Dynamics of Sales and Service

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IntroductionOne of the profound changes for com-panies in a past decade have been out-sourcing the operations such as physical creation of product, supply and logistic while keeping the service, customer sup-port in-house. The reason, after sales operation is the main experience for the customer over a life cycle of a product along with the massive opportunity in terms of revenue, brand reliance and customer loyalty over a period of time for any organization.

The greater the life of product the larger is the spread of the potential revenue from the after sales service and main-tenance. It is also been known that the customer spends 5 to 20 times the initial sales price on subsequent service and consumables. On other hand, the com-petition and higher customer demands are challenging companies in maintain-ing margins in direct sales and custom-er satisfaction levels in the service busi-ness. With these changing business dynam-ics, leading companies are rethinking their approach to the after sales busi-ness, as the same cannot be taken for granted any more. Main business get-ting affected are Aerospace and De-fense, High Tech, Automotive and other industries that have significant service business.

Hence, the need is to not just to focus on product lifecycle but to devise a strategy for the Customer life cycle Management comprising of Sales and After Sales cy-cle with a holistic viewpoint. These two parts of the product traditionally have been dealt and thought separately, but these today need to be integrated with the common objective of building cus-tomer base, increasing market share, improving after sales margins and maxi-mizing revenue during the complete life cycle of the product.

AMR research found the following for the service business 1. As competition heats up, companies

will loose high margins in after sales business if they continue to spend 60% less on information technology (IT) for their service business.

2. After sales strategy starts with foun-dation of customer knowledge that leads to operation efficiency and proactive managed service

3. Tactical automation can cut the cost by 5% to 15% within specific opera-tions: strategic automation can im-prove margins by 25% and gain 60% in share.

4. Success requires a dedicated tech-nology strategy beyond Enterprise Resource Planning (ERP).

AMR Research survey of 125 compa-nies revels the aggregated spending of the companies have a great inequality in IT spending that’s favors the product business over the service to the tune of only 20% of the overall spend being directed towards service.

The spending and focus gap is be-cause the service business is always been considered as a cash cow of the business. But with changing busi-ness dynamics and service business contributing 40-50% of profit (20-25% of revenue), achieving the operational efficiency, improving customer profit-ability and building customer loyalty has become the key.

For companies that make durable products, developing a more effective services business boost profits in the short term and provide different sourc-es of competitive differentiation in the long term.

Today the cost of acquisition of each new customer is increasing exponentially, making retention of current customer is imperative, selling him value added servic-es and new line of products, i.e. making customer for the life.

Customer Lifecycle Management (CLM)Customer life cycle management is the future of Product life cycle management. It is a unification of “Sales and after Sales” Business Management in holistic view. The sales business has been the focus across the industries leaving the after sales busi-ness to compete with independent service providers, losing the potential revenue and the opportunity to build the foundation of customer knowledge.

Figure: Customer Life Cycle

Today when the margins from the direct sales are in extreme pressure and reduc-ing each year, the revenue should not be considered per sale only, but in a whole life cycle of the product usage.

Novoally Software from the extensive study of business process, potential/op-portunities in after sales markets, have derived the possible approach companies looking into after sales business should consider how IT can be used effectively to achieve the objective of the Customer Life cycle Management. Below is a brief overview on essentials.

Foundation: Customer Knowledge

CLM integrate the initial product sales lifecycle with the customer service and experience lifecycle in order to align the business objective of maximizing the rev-enue opportunity from customer. Without CLM companies are only considering tactical investments (like separate CRM) and decision for the after sales business that only improves the ability to respond to the customer requests, missing the two crucial link of the after sales market.

1. Treating the customer requests as detached events, losing the opportu-nity to leverage them further.

2. Assuming customer will request for the service, missing the 50%-60% of the opportunities until it was too late.

Fixing these missing links between various processes in after sales market along with the proper integration of after sales processes with sales processes will make the organization proactive and protective to the customer provid-ing the ability to look a head and man-age the customer life cycle.

CLM objective is to provide organiza-tion an ability to forecast and plan for customer demand and suggest value added high margins services and not wait for customer to come for service and new request.

Building on foundation

Organizations need to start with orga-nizing the collections of process in after sales business and integrating the uni-fied after sales business with the product sales business.

The after sales business can be divided into four-macro process:

1. Customer: Service and support 2. Parts: Logistic and operations 3. Product: Services and Configuration 4. Sales and Marketing

Within these 4 categories there are around 15-20 different business pro-cesses. The objective of these process-es is to use the customer information and insight to lock in the customer and reduce the lost revenue opportunities. It is estimated that the margins on the selling parts and service are around 50% and on service contracts (AMC) or ex-tended warranty often exceeds 70%.

Thus, capturing and providing the cus-tomer information across the organiza-tion (business processes) becomes the most important area of automation. This customer information is the foundation for the organization customer relation-ship pyramid. Adding layers of offering/ideas/values on foundation provides or-ganization the platform to serve the cus-tomer for his lifetime. Each time a layer is added customer become more diffi-cult for the competition.

Figure: After Sales Service Offerings (Cus-tomer relationship Pyramid)

CLM helps and direct the companies to segment the customer based on the of-ferings and need and not based on the size, providing the platform to be pro-active by incorporating the customer information through the life cycle of the product. Another advantage from CLM is closer interaction with customer, to identify the true economics of service and calculate the service cost pricing for different level of service offerings.

Stakeholders in CLM

The transformation in the service delivery has to be brought about with change in business objective and processes, with the help of information technology (computers, software, net-works that tie it all together) enhancing the ability to under-stand, communicate with and evaluate the markets, and to anticipate and respond to the customer needs as never be-fore.

Every stakeholder will have a role to play. We can categorize them as:

• Manufactures (OEM’s)

• Components Manufacturers (Parts Supplier)

• Retailers and Distributors

• Independent Dealers

• Company Owned dealers

• Service Delivery

• Dealers

• Independent Service center

• Franchised Service center

• Mobile service center

• Sales and Marketing

Traditional relationships between each of the above stake-holder are of a disintegrated player supporting the business objective. The players do not have collaboration in terms of common framework of sharing same information to make better decision. Each entity use a part of information with a mix of individual experience and guts feeling, for production, demand forecast, customer needs, new potential services etc.

The need today is to redefine the roles of each player in the delivery chain and bring them to a common platform to share information and resources, along with personnel experience across the domains.

Mckinsey & company estimated that service networks in only four US industries—consumer electronics, personal computers, power tools, and vacuum cleaners—could generate revenues of $6 billion to $8 billion a year from after-sales service, parts, and ancillary products. Today, only a fraction of this potential is being realized

Raising revenues from after-sales ser-vices ought to be at the top of the man-agement agenda for companies in matur-ing industries.

Recommendations

1. Organization Realignment

Companies failing to establish clear business goals cannot de-cide among the dozens of possible initiatives. Companies that fail to choose mostly implement ‘big-bang’ approach intended to cover every conceivable business contingency. The basic process for troubleshooting goals for a company should start by looking at the four areas in the specified order.

1. Organization (corporate focus/philosophy, level of collabora-tion among stakeholders)

2. Process (Responsiveness to customer needs, field service metrics in place)

3. Knowledge (Visibility into technician, inventory data, etc and accuracy of data)

4. Technology (Scope of service automation, productivity tools)

The changes in the above areas have to be thought of, consid-ering conflicting interest within players (dealer, distributor, sales) along with new and changing market (geography) regulations, safety and environmental issues

Business owner should be responsible for bringing about the changes in the processes across the stockholders, focusing on collaborative goals and objectives among them. IT own-ers should work in tandem with the business owners to provide systems and integration at each point of change harnessing the relationships and information. IT owner should not strive towards complex and big systems overriding the bad process and prac-tices. In that case the systems will only integrate bad information and knowledge.

The systems should complement and enforce new practices and approach of the organization. The systems should be in place in tandem with the each new practice over a period of time with the final objective of integrating all point of information collection to a central repository. Each system should serve the purpose/objective of the users/ stakeholders in terms of usage experience, information capturing and retrieval.

The objective should be a close knit of systems or a big system (developed in pieces over a period of time based on various key functions point ) where each system covers a business process (function) in itself, along with receiving and providing key infor-mation to other business systems as per need.

In case the organization has already invested in lot of diverse system with no expected benefits and returns, they should re-draw the pieces of the IT puzzle to fit together and to help tighten the links between IT and Business. On this new architecture the missing pieces or functions should be build.

It is always better to start with a lean architecture, aim-ing for systems and tasks to be accom-plished in steps, with saving from each helping to fund the next. Overhaul-ing IT architecture may take 3-5 years to complete; the saving can start in less a year with other intangible benefits resulting into sizeable payoff.

One major manufacturing company faced a daunting chal-lenge for its service delivery (after market operations) in the emerging markets. There was no common process and practices and big system installed were not been used as per requirement. As a result Business owner and IT owners collaborated closely to redefine the process and approach. Business owners: responsible for process implementation. IT owners: responsible to build smaller and simpler sys-tems.

Each installation in the market were in steps; staring with training of new processes and practices with next step installing and training of the system build on the process and a follow up on the same for a period of 6-8 months to reach the performance goals that’s determined the returns on the investment and time. The key here is that the com-pany hadn’t invested heavily in putting big systems, but invested in building skills along with smaller and leaner sys-tems that support the skills, slowly adding new functions in systems as confidence grew among users in the markets. Thus, by been focused the company managed to spend less and deliver more.

The virtuous cycle – more customers, more productivity, and better economics – generates bona fide opportunity for value players to move into new product and service cate-gories. Companies in other sector like E*Trade, DELL, Wal-Mart, Southwest and Ryanair airlines thrive on impressive cost and its relentless execution with smart use of Technol-ogy. These advantages are typically years in making and so difficult to emulate that rivals lacking them find hard to compete on price and quality of service.

2. Systems (Information Integrators)

To succeed in after sales business, companies must have right part at right place, with right pricing at right time.

Once this is in place, companies should start looking be-yond the basic service and technical support towards op-timizing warranty cost, designing and selling more service contracts, tracking and segmenting customer based on need to measure economy of the offered services.

Service delivery centers can also act as a valuable labo-ratory for developing new products and services, provid-ing information about customers’ needs, and for showing where products have failed to meet them.

Start with small, focused initiatives to achieve quick wins at minimal risk and then build on the success as they evolve.

For some basic systems are in place and the need is to move to next step to evolve your business and capture new market. Below is a solution map for after sales business. The automation and linking of the information points between all business processes is filled with risk and potential rewards. They should be clearly selected and implementation monitored over a period of time to get the reap reward (cus-tomer satisfaction). Aftermarket systems data also need to be linked to the produc-tions systems (ERP) and financial systems to complete the full integration of data.

For example, one midsize industrial-products manufacturer, for example, is decid-ing whether to rent products, start a mobile repair service, and offer service con-tracts and extended warranties—all as a result of insights gleaned from the com-pany’s service network.

Figure: After Sales Solution Map

Today the IT investments for companies are generally concentrated in business process automation (production side) and sales/ marketing improvement. Service side of business is underinvested resulting in the imbalance in service provided to the customers. It is estimated that 4-5 times of IT spending is made on delivering product as on delivering services. It has become imperative for companies to look at their IT spending and balance the investment to improve competitiveness and customer satisfaction.

Across industries the service business contributes to 20%-30% of revenue, but the profit is disproportionately earned at 45%-50% as compared to 55%-50% from new product. Any increase in service revenue even marginally (10%) and reduction in cost (10%) can increase the profit from aftersale business by approximately 40%. It is these figures along with the other competitive benefits that justify the required investment in service part of business.

The choice is clear-cut – focusing and investing on service business can dramati-cally improve profitability and bottom line driving customer loyalty while gaining competitive advantages.

References

1. AMR Research: Service lifecycle management (part 1): The approaches and technologies to build sustainable competitive advantage

2. The Mckinsey Quarterly: How to make after-sales services pay off (Russell G. Bundschuh and Theodore M. Dezvane)

3. The Mckinsey Quarterly: The secret life of factory service centers: For a lucrative new source of revenues, profits, and market information, manufacturers need look no further than their own repair shops. (Whitney L. Alexander, Sandeep Dayal, Jack J. Dempsey, and Jonathan D. Vander Ark)

4. Source IRI: 2002 Mckinsey survey of customer and channel management.

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