A Guide on Turning Opportunities into Results - Barkawi · I 2 Authors A special thanks to Jochen Lehman, Service Manager at BMW AG and Fabian Reusch, who have been critical contributors

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After Sales Services: The Quest for Faster Growth and Higher Margins

Barkawi Management ConsultantsMunich • Atlanta • Moscow • Shanghai • Vienna

A Guide on Turning Opportunities into Results

Besuchen Sie uns:http://www.barkawi.com/publikationen/after-sales-services.html

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Authors

A special thanks to Jochen Lehman, Service Manager at BMW AG and Fabian Reusch, who have been critical contributors to the success of this study.

Oliver Bendig, PartnerOliver Bendig is partner in our Munich office responsible for After Sales & Customer Service at Barkawi. In his 20 years working on industrial services related topics he has worked in multiple regions, incl. Europe, Americas, China and India. He has supported service development for industrial clients in a broad set of sectors, ranging from Full Service Transformation, Operational Improvement to Organization Design and Service Pricing. Many of his clients have achieved to double or triple their service business.

Michael Springmann, Senior ManagerMichael Springmann is Senior Manager in Barkawi’s After Sales & Customer Service Unit. He has supported companies in the Industrial Sector, Telecommuni-cations, Consumer Products and Insurances in developing their service business. He has broad experience ranging from Service Processes Optimization, Service Operations to supporting the roll out of repeatable Service Business Models.

Jonas Janik, ConsultantJonas Janik is Consultant in Barkawi’s Operations Excellence Unit. He has experience from working with Original Equipment Manufacturers of Printing Machines and Steel Plants to Consumer Products and Building Technologies. His experience ranges from Service Full Potential to Service Pricing and Operational Improvement.

Carena Barkawi, Founder and CEOFor many years, Carena Barkawi has been CEO of the award winning consultancy Barkawi Management Consultants in Munich. Barkawi Management Consultants is part of the Barkawi Group, where Carena Barkawi is CEO of the Holding.


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A Guide on Turning Opportunities into Results

INDEX

1. Introduction: The service opportunity 4

2. Service growth: How to grow in service 7

3 Service strategy: Find the right service offering 12

4. Service organization: Design an effective service organization 19

5. Service supply chain: Optimize spare-parts management 25

6. Service efficiency: Improve service efficiency 29

7. Service Pricing: Correctly price service offers 34

8. People, culture & service transformation: Make service an attractive field 39

9. Technology & service opportunities: Foster service innovations 43

10. This is Barkawi 48


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1. IntroductionThe service opportunityService continues to be the largest opportunity to grow earnings for manufacturers of industrial equip-ment. But many OEMs struggle to tap new growth possibilities, to establish and run a first-class service team, or to optimize delivery, costs, and prices.

Why service must be a priority

Winning the bid to install elevators in the Kingdom Tower in Jeddah, Saudi Arabia is foremost a matter of prestige. But if you want to be profitable in this industry, you need to service as many of Europe’s six million elevators as possible. It is an open secret that the same is true of many industries. Compa-nies need their new-equipment business to have an existing customer base that can be serviced profi-tably and supplied with high-margin spare parts. In short, service is home to the true battle – the battle that determines the future of a typical OEM.

“It’s hard for us to find additional growth

potential in service.”If you think your service unit has exploited all of its growth opportunities, you should take a second look. OEMs that shift their focus from new equipment sales to services experience significant increases in earnings and a more stable business at a comparatively low investment.


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OEMs that shift their focus from new equipment sales to services experi-ence significant increases in earnings and more stable business despite a low investment. Analyses indicate that equipment customers annually spend an average of 5 % of the original equipment price on service and maintenance. But the true figure is often much higher. For example, a new packaging machine for refrige-rated fluids costs some € 1.5 million, but entails annual service expenses of some € 220,000. In turn, the opera-tor will spend more on service in less than seven years than he invested in equipment – even though the machine has a service life of ten to twelve years. Service constitutes a major profit pool that many OEMs do not fully tap.

The service industry demonstrates robust growth. Buyers and operators of equipment increasingly tend to buy services that increase the efficiency of their equipment, take risks off their balance sheets, and reduce the complexity of their operations. Typically, an OEM’s service operations grow bet-ween 5 % and 10 % annually – compared to only 2 % for new equipment. Moreover, average service margins range from 10 % to 25 %, while profits on sales of new equipment equate to between 5 % and 10 % of revenue. Last but not least, industrial services typically deliver a constant revenue stream, whereas sales of new equipment are very cyclical for most OEMs.

The Kingdom Tower marks the center of Kingdom City, a new

district in Dschida. 1,007 m high – opening in 2019.

690,000elevators in Germany

18,000people working in the

elevator industry in Germany

Copyright: © KONE Gm

bH/Jeddah Economic Com

pany

New installation of an elevator often is a matter of prestige, profit is made with spare parts and service technicians


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Making service successful

Equipment manufacturers face numerous obstacles, however, to establishing a service business. It all starts with the traditional OEM priority on developing new equipment and sales revenues that is em-bedded in nearly every OEM’s culture. This renders service organizations‘ second-rate. They receive less recognition and attention from management; they tend to be a collecting tank for employees shunted from new-equipment business; and they generally lack adequate strategies and leadership. It is no wonder that service continues to underachieve.

Typical challenges executives face when accelera-ting their service business include

• readjust the priorities for and with their servicebusiness,

• identify the full service potential,• develop winning service strategies,• build effective service organizations,• boost the effectiveness of service delivery, and• price and sell service better.

This brochure explores challenges that service exe-cutives are confronted with – and how companies can become genuine champions of service.

1.1 Service revenue share in different industries

Source: Barkawi 2016

12 % 7 % 5 %15 % 15 % 16 %Service growth p.a.

Pumps Dieselengines

ElevatorsPackaging machines

Gas/ Steam Turbines

Aeroengines

30 %

40 %

55 %

35 %

45 %

60 %

Share of service in total turnover


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“Our service is doing all right, but how can we make it a true growth engine?”If you want to maximize your service business, you need to abandon the philosophy of traditional manufacturers. Start by boosting the image of service among your own employees, attract more people to service, and offer equally appealing careers in service.

2. Service growthHow to grow in serviceService growth is not only about careful research, planning, and investing. It also requires creating a new mindset at OEM workplaces. Successful service businesses are built on five pillars:

1. Defined goals provide a general framework.2. A business focus defines the playing field.3. A clear customer value proposition and its

translation into products, sales, and pricingresults in an excellent portfolio.

4. A stronger, fostered service organizationsupplies the right capabilities andspecializations in the right place.

5. A cultural transformation throughout thecompany attracts top talent to service,subsequently leading to optimum dovetailingbetween service and new-equipment business.


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What to achieve? What is the right ambition regarding service?

A service-related ambition will define the role that service plays within a company. Ambition starts with financial targets. Only bold aspirations will force an organization to re-think widely accepted restrictions and overcome the limits of incremental growth.

Service ambition also entails defining whether a service provider wants to become an innovative lea-der by supplying its customers the latest technolo-gies and trend-setting performance improvements –or instead being the market-share leader by keeping prices low. Neither approach is right or wrong.

There is such a thing as too much or too little ambition. The CEO of a textile-machine manufac-turer asked us to boost his service business by a factor of five. After a thorough analysis, we mana-ged to downscale his expectations so that his staff would not become discouraged. The company ulti-mately tripled its service business by transforming service into its main pillar of profit. This was possible because staff was persuaded by a sound aspiration to embrace the growth strategy. At a manufacturer of pumps, conversely, we faced a very different situation. It required a great deal of effort to con-vince the engineer-driven board to adopt the bold ambition of doubling its service business. Everyone had been content with a service growth rate of

2.1 The Barkawi Service Excellence Pyramid


Ambition: What to achieve?• Service aspiration: Define a clear role for

service in your firm• (Financial) aspiration: Be ambitious!

How to win?• What is the winning product offering?• How to organize sales and pricing?• How to deliver the service?• How to manage the service supply

chain?

How to enable?• How to organize for Service?• What service capabilities

needed?• Which service platforms?• How to monitor?

How to succeed?• How to ensure

delivery of results?• How to make service

a part of your DNA?

Where to play?• What IB to focus on

(own vs. 3rd party)?• What markets and

customers to focus on?• What service activities to

offer?

The service opportunity• Service highly attractive: EBIT 20 %+• Strong growth: 5 % p.a• High share of business: 20 % to 45 %

Serv

ice gr

owth

Where to play?

How toenable?

Howto win?

Ambition

How to succeed?Quick Wins

Transformation Path

Mobilized teams


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3 to 5 %. And it was precisely that contentment that prevented the company from fully tapping its service potential.

Where to play? What services can we offer? To whom? Where?

A focus on service defines the battlefield: those areas in which a manufacturer undoubtedly strives to be Number One for its service customers. As always with such decisions, it is equally important to clearly state what services you will not offer and what regions you will not service. A service endeavor is worthwhile if services offer very good benefits to customers, if customers operate service-intensive equipment, and if regional customer clusters allow for efficient, or even elaborate, service offers.

Another key consideration is whether to concentra-te on one’s own customer base, or to service third- party equipment, as well. The question of ‘What do we offer?‘ must be answered regularly to continuously tweak a company’s service focus.

Deciding which customer groups to focus on, and how best to serve them, must be an informed decision. It requires a good understanding of custo-mers, their needs, and their finances combined with knowledge of a region’s service capabilities. In fact, picking the right customers and offering them the right services – and base-serving or even shedding all other customers – constitutes a key factor to success in the service business. It is also one of the toughest decisions made by top managers.

How to win? How can we improve sales and build customer loyalty?

A good service strategy needs a clear value propo-sition across customer segments. In addition, sales specialists, service technicians, and customers must comprehend this value and the services. In turn, service offerings must be defined by standardized service elements that are easy to describe, sell, and execute. Pricing must reflect the value that ser-vice offerings create for customers, and not merely costs plus service elements. Moreover, advanced sales processes and tools must help sales teams to sell priority services to priority customers. As for execution, standardized processes coupled with load balancing of the service network will ensure first-class service.

How to empower? How can we create a service engine that runs smoothly?

Boosting a service business is also a question of organizational empowerment. Many manufacturing companies have experienced service initiatives that failed. One key reason is the dominant position of new-equipment business, which has traditionally led equipment manufacturers to think in terms of short-term revenue instead of long-term profit. New-equipment sales generate significant revenue per transaction and are celebrated company-wide. Service revenue, conversely, is often paid in small installments spread out over years. Even though they can be very profitable, service contracts are rarely touted by headquarters.


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Service leaders have mastered this challenge by putting service pursuits on an equal footing with new-equipment sales. But that is not all. The same leaders systematically match their service capabili-ties – including service sales, field technicians, and support – with potential. They also implement key performance indicators to measure success and associate them with incentives. Service leaders furthermore create global or regional positions to empower local service operations. Leaders also help service staff provide excellent customer service – which distinguishes the company in the market- place.

If a company wants to grow service significantly, it is almost always necessary to invest heavily in people and capabilities. Experience shows that new service specialists often act as a catalyst, initiating an in-house shift in mindset and helping accelerate the service business.

How to succeed? How can we make change happen?

Most manufacturers understand the considerable potential of service. But it is difficult to become a premium service provider without modifying the DNA of an engineers’ company. True service success necessitates commitment from an entire organiza-tion. It all starts with keeping a service initiative on time and within budget – something that cannot be done if there is much internal opposition. All emplo-yees must be won over and management commit-ment must be unwavering.

Service careers must offer as much promise as new-equipment careers. And opportunities for a promotion should be better for people with experience in both segments. The mentality of lucrative equipment deals must transition to a mentality of long-term profits. Salespeople ought to be judged by overall expected profits of sales instead of revenue. In the long run, innovation must combine technology and service. Future offers should aim for joint equip-ment/service offers. The full potential of service can be realized only if an entire organization, from top to bottom, appreciates the vast potential of transfor-mation and embraces change.

Case study: Successful service growth at an automation company

The CEO of an international automation OEM made a very clear statement regarding the future of services. He announced that services would become the focus for the entire company’s growth. More precisely, this CEO announced a goal of doubling service revenue within four years and eventually making it 30 % of overall company revenue. In a company-wide initiative, the new service strategy was jointly crafted by headquarters and key pilot markets to create local buy-in. This characterized the new service engine that was then rolled out in over 40 countries. In just one year, the service segment grew by 17 %. It continues to grow rapidly at very attractive margins. If you walk the halls of this company, you will immediately notice that service has become part of the company’s DNA. You will not find a meeting – neither at headquarters


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nor elsewhere nor among R&D speci-alists – where service is not an im-portant topic on the agenda. What’s more, service is no longer a career dead-end; it has instead become an appealing opportunity. This holds true at all levels, even at the top. Indeed, the same executive who oversaw the service transformation went on to become the first board member with sole responsibility for service.

2.2 Typical path to boost your service business


Set ambitious yet realistic targets. Make a difference!

Don’t espouse the conservative employment policy of a manufacturer. Invest ahead of the curve instead.

Make service growth a top management priority. Put a member of the executive commit-tee solely in charge of service.

You cannot be everything to everybody everywhere at a profitable margin. Focus!

Persistently demonstrate the management’s commitment. Make it a mandatory agenda item at management meetings.

Don’t forget to initiate a cultural change. Make service an appealing career opportunity.

DO‘s DONT‘s

• Achieve fulltransparency oninstalled base

• Understand yourcustomer needs

• Create a winningservice portfolio

• Focused servicesolutions forprioritizedcustomer segments

• Reduce internal partsorder processing time

• Target customersproactively withcustomized offers

• Foster the warehousefootprint driven bysales & operationsplan

• Resolve customeremergencies 24/7

• Enable global and localservice organizations with clear rolesand responsibilities

• Attract top-talent forservice career paths

• Control with aService-Cockpit andan aligned incentivesystem

• Strive for a repeatablebusiness modelenabled by state ofthe art processes andIT platforms

Select your playing fields thoroughly

Lead with best in class customer service

Create a state of the art service platform and business model

1 2 3


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3. Service focus strategy

Find the rightservice offeringMost equipment manufacturers are far from realizing their full service poten-tial. Many continue to focus instead on supplying spare parts – and even that is often done passively, waiting for the customers to order. By doing so, manufacturers leave a lot of money on the table. Service potential exists throughout the life cycle of equipment. Service opportunities lie in wear and tear, unique customer priorities, and targeted value creation – by unburde-ning customers, for example.

Gain transparency on service potentials

A service strategy starts with a thorough analysis of service at present and a vision for the future. The most important source for OEM service contracts is their own equipment that customers already have. A deep understanding of the existing customer base is essential to developing a winning service offering.

Create an inventory of existing equipment. The first step in expanding product-related services is to obtain a comprehensive overview of equipment that

“We need more attractive service offers to become a

preferred life-cycle provider.”If your value proposition in service is unclear, the reason is often a lack of focus. You will likely realize that your new-equipment customers are your main competitors in service and that they try to cherry-pick your offerings.


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can be serviced. Identifying types of equipment as well as the figures and technologies used by customers is a time-consuming task, but the effort will pay off.

Assess service potential per unit of equipment. The second step is to calculate potential service revenues of customer equipment. A full-potential assessment multiplies existing pieces of equipment by the maximum number of services possible for each type of equipment. This must then be compa-red with the sizes of service market in each region. Analyses of customer buying behavior, offerings of service providers, and regional differences in prices and customer uptake provide a picture of how much additional service business the OEM can acquire. Such assessments typically uncover significant service growth potential.

Having a clear picture of the installed base and service potential makes it easier to evaluate the competitive situation and determine why service opportunities have not been tapped. Competing service providers only rarely provide the stiffest competition. Usually it is the customers themselves. Most customers perform 30 % to 50 % of service tasks themselves!

Re-define the service focus

The second big question: Which service activities will be offered in which markets and to which customers? Identifying all services for the lifecycle of existing equipment will lead to a key question. What

is holding a customer back from using the full range of services? Which services might be offered in a different way? How can businesses incentivize customers to buy services? Answering these questions often results in service-contract offers, increased availability of spare parts, and value pricing. Further considerations involve improving and growing services for customers’ existing equipment.

Regional focus. Analyses of regional differences address customer type, customer density, travel and transportation difficulties, local sales capabilities, and cultural issues. Analyses then show where efficient, high-level service delivery and service sales are possible as well as which offerings must be adapted for which markets. A common regional mistake is to sell service contracts in markets with limited service possibilities. There is no economical way, for instance, to fulfill a full-service contract for just one wind turbine in the desert of Azerbaijan.

On the other hand, winning in key markets is a must. There is no excuse for failing to maximize the level of service in high-volume, high-margin markets with a significant installed base. Service improvements in these countries will immediately boost revenues and profits. What’s more, the company’s success depends on doing so. Such markets need bold investments, full managerial commitment, maxed- out service organizations, and smoothly running processes.

Other markets may show promising development, but installed base is still low. In these cases, targeted


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service operations are the right way to go: cautious structural investments and a slightly reduced service offer.

Customer focus. Analyses of the offerings of other service providers and of the value of services in different arrangements – such as industry-specific usage modes of machinery – are very useful. They can reveal gaps in a company’s range of offerings, ascertain whether pricing is right, and provide insights on promising new services.

A manufacturer of movie projectors found that its new modular projectors led customers to use local service providers instead of OEM service technicians. After all, it was easy to read out the projec-tor’s status and module replacement did not require highly specialized personnel. The manufacturer responded by shifting its focus from traditional equipment sales to leasing contracts including full-scale servicing.

Performance focus. Providing excellent service is crucial for all markets. Let us consider white goods such as refrigerators or dishwashers. In mature markets like Germany or France, customers expect a service response within two days. In China‘s tier 1 cities five to seven hours are often regarded as not sufficient. Knowing the differences bet-ween merely adequate service and excellent customer service can provide the right balance between customer satisfaction and costs.

Product focus. Manufacturers have traditionally provided service for customers that purchase their equipment. But in many industries nowadays, service is a matter of everyone servicing equipment regardless of the manufacturer. Elevators are just one example. In general, the more mature an equip-ment segment becomes, the more likely it is that non-OEM service will emerge. Depending on the market situation, offering services for third-party equipment can be an excellent avenue of growth – or a do-or-die proposition. In markets where service is typically proprietary, however, competitors will likely strike back.

Take service to the next level

Rising maturity and complexity, both in the equip-ment offered and in the customers’ business, offer a chance to step up the service level. Customers want fewer worries to deal with, and they are increasingly interested in the efficiency of equipment and manu-facturing. In many industries, the time is ripe to raise the level of service and become more prominent in the customer’s business model. However, this is not true for all industries. There are indeed industries where OEMs face barriers that effectively prevent them from stepping up their level of service as described below.

Level 1: Passively answering the phone. Traditional service for industrial equipment focu-ses on fixing problems: repairing broken equipment, training staff, and especially selling spare parts on request. This service model prevails, for example,


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in the markets for standard machines in many developing Asian markets, but has eroded consider-ably in recent years. Additionally, a focus on passi-vely selling spare parts will not foster a bold ambition to double or triple one’s service business.

Level 2: Actively offering long-term service contracts and upgrades.

The next rung on the service ladder turns ‘service on request‘ into ‘service on schedule‘ – continuously and proactively. Regular inspections or service contracts provide an uninterrupted stream of service revenue for OEMs and reassure customers that their equipment is in good shape. Equipment upgrades and performance improvements enhance custo-mer productivity. This level is common in customer service for new cars and in many equipment segments – from packaging machines to movie projectors – if the manufacturer or its service partner typically conducts regular inspections.

Level 3: Driving your customers’ efficiency. Predictive maintenance, service bundles, and online machines enable equipment customers to simplify their business and increase the efficiency of their operations. Examples can be found in the elevator or paper-equipment segments, where online maintenance and process-engineering support have become standard OEM offerings.

Level 4: Taking risks and worries off the customers’ shoulders.

At the highest service level, manufacturers relieve their customers of many operational tasks and risks. Manufacturers do this by taking over the management of operations or facilities, by providing equipment on a pay-per-use basis, and/or by re-locating resident engineers with special know-how to their customers’ facilities. Some customers may even outsource the manage-ment of entire plants, including equipment from

3.1 From Service Provider to Service Champion


Level 1: Service provider

e.g. passively answeringthe phone when

customers call andask for a spare part

Providing service in a reactive way

Actively offering continuous service

contracts and upgrades

Driving your customer’s efficiency

Taking risks and worries off the

customers’ shoulders

Level 2: Service supporter

e.g. proactivelyoffering servicecontracts uponmachine sale

Level 3: Service partner

e.g. selling preventivemaintenance servicesto increase machine

uptime

Level 4: Service champion

e.g. offering‘power-by-the-hour‘

machine usage


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other manufacturers. Examples include compres-sor manufacturers that build and operate complete compressor stations and charge their customers based on uptime, and equipment manufacturers in the power-plant industry that offer preventive maintenance and line-optimization services regard-less of the supplier of machinery.

Today’s customers expect interactive and intuitive services, without complicated service communication and technician travel costs. The data generated by customers and equipment makes such services possible. After all, most industrial equipment con- tains sensors and processors and is often online as well. Using them for remote and predictive main-tenance, however, remains limited. The intelligent use of data is poised to increasingly optimize service quality and the efficiency of field technicians.

Complement service portfolios with solutions

Solutions are combinations of products, services, and support that create a specific customer value that is greater than the sum of their parts. As this works only for certain customer groups, intelligent customer segmentation is the key to success. Based on analyses of specific customer needs, service leaders aim to create solutions to future challenges – ideally before the customer is even aware of itsneeds. Product life cycles provide guidance on whatto offer for which types of equipment and respectiveage.

There are three categories of industrial service offerings:

Core life-cycle services range from repair and main-tenance to the provision of spare parts, and are offered by most OEMs. Internally, they are often seen as an obligation with limited P&L contribution. By strengthening core life-cycle services, profits rise and a company is prepared for tackling more advan-ced services. There are generally two ways to grow life-cycle services:

• Servicing more equipment (by acquiringmore customers, for example, or by servicinga broader range of equipment)

• Increasing service frequency/options(service bundling, service contracts,retrofit packages, online services, etc.).

Advanced Services are ongoing service contracts that might include facility management, predictive maintenance, benchmarking services, online mo-nitoring, and/or workshop-in-workshop setups. The foundation for advanced services is always a service level agreement (SLA). Advanced services typically create additional customer value in at least one of these four areas:

• Increased return on assets: improving theequipment’s operational value (e.g. byimproving equipment uptime, eliminatingwaste or boosting efficiency)


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• Risk reduction: assuming customer risks(by improving safety, ensuring compliance,reducing investments, etc.)

• Knowledge transfer: leveraging specializedknowledge of equipment manufacturers(by means of training seminars, facilityoptimization or consulting on equipmentoperations, etc.)

• Complexity reduction: taking non-core tasks offthe customer‘s shoulders(facility-management services, rental/financing schemes, pay-by-performancearrangements, etc.)

Complementary capabilities are services not neces-sarily associated directly with a company’s core product. They can nevertheless enhance business in general: be it financing, engineering or produc-tion-process consulting. Such services can be very lucrative. The risk lies in too many resources being invested in new skills while the company’s core focus becomes blurry.

Services that cannot be offered competitively neces-sitate partnerships with independent providers. Alternatively, such services must be removed from a company’s portfolio.

Case study: Realizing the full service potential for industrial robots

A manufacturer of industrial robots realized that it was capturing only some 50 % to 60 % of the annual € 600,000 of service potential identified for

its customers’ robots. In spare parts the share of wallet was 70 % to 80 %, but the potential revenue coming from contracts, training, and upgrades was widely untapped. However, in order to reap this growth opportunity, the company needed to know more about its customers. This was accomplished by conducting an extensive customer survey which helped identify those services which customers truly needed and were willing to pay for. As a result, new services addressing customer needs were developed. A market analysis revealed a service growth opportunity of 6 % annually.

Case study: Lifetime service approach for power generators

In the case of complex equipment, revenue potentially generated by services can easily surpass purchase prices. When it comes to machines operating for 20 to 30 years, upgrading becomes a key source of revenue for the manufacturer.

A U.S. manufacturer of power generators therefore extended its service offering to third-party equip-ment. Service technicians were instructed to actively look for products of competitors while servicing generators at customers’ sites. Whenever they encountered a third-party generator, they would offer to service it as well. This saves customers the hassle of working with multiple generator-service teams. In this way, the company not only maximi-zed service revenues for the duration of its own generators but also added the full service potential of third-party equipment.


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Driving equipment performance with service contracts

Service contracts are an attractive way to secure stable service revenues while providing the custo-mer with improved equipment performance. However, many industrial companies fail to achieve the volume and margin targets in their service- contract strategy. Some service contracts even run substantial deficits, cemented by long-term contracts that are hard to terminate. We have iden-tified a combination of typical issues that can turn a promising opportunity into a losing proposition:

Underselling: The added customer value generated by service contracts is difficult to grasp and explain. At many compa-nies, sales capabilities are insufficient for arguing and selling this benefit, resulting in low margins.

Miscalculation: Many industrial companies have no tools in place to accurately calculate supply costs and risk-taking costs. This often results in offers that are too low.

Overstretching: Service offerings in contracts are often too broad and exceed the expertise of field staff. Another typical problem lies in insufficient

resources and capabilities of local field staff, who cannot handle the volume of contracts sold.

These pitfalls can be avoided. Successful service-contract strategies follow a clear business development path, and prepare sales and field staff step by step. They must be acutely aware of the needs and opportunities of a given market and customer segments.

Systematically track the equipment you have sold.

Don’t be content with your service revenues if you haven’t analyzed the full service potential based on sales to your customer base.

For new service possibilities, look for interesting examples in the market and create a likely service scenario.

Don’t offer services in regions that are too remote to be serviced properly at reasonable costs.

Develop comprehensive service solutions instead of individual service products. Move up the scale from selling spare parts, maintenance, and repair to more advanced offerings.

Don’t forget your core business when entering new fields of service. The further away from the core, the more costly capability build-up will become.

DO‘s DONT‘s


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“Our customers feel it is difficult to do business

with us”If your customers are not serviced properly, the most frequent reason consists of unclear or overly complex in-house responsibilities. To perform exceptionally, a service organization needs the right set of targeted customer capabilities and responsibilities.

4. Service organizationDesign an effective service organizationAll lean and agile service organizations espouse two essential principles. They reduce ambiguity in daily operations by clarifying responsibilities. And they maximize customer satisfaction by offering the right set of capabilities. On the one hand, responsibilities define what the service organization does and what the interfaces are, but also what the service organization does not do. Capabilities, on the other hand, provide know-how and meet customer needs, whether by in-house staff or partners.


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There is no single blueprint for designing the service organization of an industrial-goods manufacturer. The solution can lie in a new model for a fully integrated equipment-and-service provider or a totally separate service organization. Most of the time, it will be something in between. Full-matrix organizations, on the other hand, specialize and keep separate most functions between new business and service, from the supply chain to sales. But they also ensure collaboration and joint decision-making among all parties (see Figure 4.1).

Consider the starting position

Most companies start with centralized speciali- zation centers when they truly commit to growing their service business. Some service organizations, if the degree of expected change is large, may benefit from splitting off from new-equipment business. After all, a higher degree of autonomy allows them to better develop their capabilities and focus on growth. Over time, it may make sense to return the service entity closer to the equipment

4.1 Service organization: Not one fits all

Key roles for service organization:• New concept development• Best practice sharing• Tracking and measuring systems• Group service strategy

Service capabili-ty center

No P&L responsibility

Fullmatrix

Separate service business area


S

COO

A

A

B

C

CEO

B C

SA

CEO

B C

S A

CEO

B C

= Service P&L responsibility

Key roles for service organization:• As in capability center• All service business operated

jointly with respective businessareas

Dual P&L for all service businesses


Key roles for service organization:• As in capability center• All service business operated by

one separate service unit

Full P&L responsibility for all service business



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business again, which can help it stay up to date on technology. This can also help embed service consi-derations within product development, which is also essential to long-term success.

Recently, the trend has clearly been stand-alone service organizations. Pursuing such an approach offers the greatest potential, especially if companies are looking for rapid service growth.

There are many ways to organize a successful service business. Effective organizations are characterized by clear responsibilities and assign- ments. Figure 4.2 shows the service setup of an OEM for construction machinery. Different service tasks are mirrored by three pillars: sales, supply, and

support. Supply is split into spare parts, customer services, and infrastructure & logistics. By assigning capabilities and responsibilities to each (sub) function, and therefore to individual employees, the organization is empowered to do business properly.

Facilitate better service sales

Service can be offered and sold by a dedicated service-sales force or by an existing team for new-equipment sales. However, both options have advantages and disadvantages. While it can be rewarding and easier with a separate service-sales force, this may also lead to higher organizational costs. A shared unit, on the other hand, decreases the potential of lost business due to communica-

4.2 Organize for service: Service champions anchor service on executive committee level


CEN

TRAL

LE

VEL

LOCA

L LE

VEL

CEO

Markets/ SalesOperationsProduct Line 1-n

Region n

Other functions

Region 2

Sales

Region 1

Parts & Service

Operations

Parts Product mgmt

Finance HR

Mainte- nance &

Contracts

Technical Support

Service Sales

• Global service strategy• Target setting / KPIs• Service product development• Processes, tools and operational

standards setting• Technical support• Parts management

Global Service Competence Center

Regional Service CC

Head of Global ServiceCompetence Center

Service


I 22

tion issues. But it may fail to realize its full service potential if employees are not properly incentivized.

The issue of disjointed communication among members of a sales force becomes clear in a custo-mer statement: ‘If I want to place an order, it takes hours or even days to track down the right sales person‘. This complaint of a large automation com-pany may sound familiar to many companies. In this case, 13 (!) sales reps were trying to do business with a single plant manager. Though the automa-tion company is a global player with many different product lines, it is obvious that such a setup hinders business rather than drives it.

In addition to the form of a sales organization, creating a standardized sales structure represents another key success factor for service growth. In fact, many service-sales teams struggle or fail due to missing core processes. Examples for such processes are:

• Consistent and transparent lead management.A plant manufacturer began to exploit leadsmore systematically, aided by an upgradedCRM system and processes with integratedsales data. The rate of success rose by 20 %.

• Project profitability calculations. The salesforce of an equipment manufacturer in thesteelmaking industry improved project-costtransparency and focused on profitabilityinstead of revenues. They thus increasedaverage project profitability by 10 %.

A critical aspect with many equipment manufacturers is the sales incentive system. They have traditionally been devised for equipment sales, and thus does not reflect the nature of service sales. While a new equipment deal typically takes three to six months and ends with the purchase, closing a services or solutions deal will easily last 12 to 18 months; contracts usually last for at least two years. In addition to salespeople, several experts are involved throughout a typical service-sales cycle – and they all need to be incentivized in accordance with their contributions.

Here is an example of the value of a sales-incentive system. The sales incentives of a packaging machine company were oriented toward new equipment and high-margin spare parts. Many salespeople reported that their customers might be receptive to higher-value service products. But the sales process would take months and require long nego- tiations with customers on prices and risk – especially if more than one business unit was involved. Most importantly, such difficult sales would entail lower incentives. So they chose to ignore the full service potential, instead concen- trating on highly incentivized new equipment and spare parts.

Another obstruction in the path to higher service levels are insufficient contacts and capabilities. A manufacturer who plans to upsell – from spare parts and repair jobs to entire service solutions – will need to refocus regarding the organizational level on the customer side. Typically, a solutions buyer is not the


23 I

head of maintenance – who purchases spare parts – but instead the plant manager or even the CFO/COO. Therefore, the existing sales force of a com-pany focused solely on spare parts will lack accessto the right customer levels. Additionally, due to thecomplex nature of service contracts, they usuallylack the capabilities to sell solutions as well. Thesame goes for service technicians: most will needintense training and support as well as additionallocal/regional resources.

Configure an optimal service-delivery network

Although service is an increasingly important earnings component, only a limited number of manufacturers have created outstanding service delivery capabilities. Most organizational structures and associated capabilities have grown over time without being forced to enhance efficiency and effectiveness.

The same applies to service delivery networks. There is an endless number of suitable configurations for a manufacturing & service network – but no one- size-fits-all solution. The foundation should always be a bottom-up, process-based definition of roles and staffing. In the long run, and assuming a greater prioritization of services within the com-pany, most organizations will gravitate toward a service business that increasingly takes the lead over the product business.

Depending on industry and customer demands, reaction time is the key differentiator for service.

In some industries, it does not matter if a service engineer needs two days simply to reach a custo-mer’s site. In other industries, by contrast, even minimal downtimes are inacceptable; every hour of downtime triggers tremendous costs and/or lost revenue. The maintenance manager of a global soft-drink company estimates losses of some $ 8,000 per hour if one of his filling machines fails. An efficient setup for service centers and spare-parts delivery is the basis of any successful service offer – with a strong impact on the bottom line.

As mentioned above, it is important to have the right capabilities in place to successfully deliver service. This can be done via in-house resources or be delegated to third-party providers. The right make-or-buy balance should be specified for each target market.

Some service leaders serve their core markets with their own extensive network of warehouses and service technicians. Conversely, these same leaders have outsourced to external service provi-ders in non-core markets. The right combination can save costs for manufacturers. For outsour-cing solutions, a company-wide certification strategy is a proven way to ensure consistent quality of service to customers in all markets. The following chapter covers network layout and spare-parts management in detail.


I 24

Case study: A new service organization for construction equipment

A construction-equipment manufacturer had four service divisions that subsidized the loss-making new-equipment business. With stable market shares in the new-equipment business as his best-case scenario, the CEO realized that an increa-se in service sales would be the only way to reach his ambitious growth targets. Service analyses pointed to a purely reactive service organization with very high margins on spare parts. None of the four divisions was offering higher-level services such as predictive maintenance or equipment upgrades. And none was using equip-ment data for proactive service offers. It quickly became clear that just one comprehensive service division would be the best way to boost service sales. A new unit would have quickly conso-lidated all profits, however – leaving virtually all other divisions with losses. The transition was made easier in two steps. The new unit was created and began operating, but for the time being all service revenues will stay with their respective divisions. In a few years, once the new service unit is well-established in-house, the CEO plans to give it full P&L responsibility.

Clearly define the hand-over point of responsibility between new product sales and service.

Don’t believe putting roles & responsibilities (RACI) on Power-Point charts will be enough.

Incentivize your sales force financially to actively sell service solutions.

Don’t do everything yourself – certain service capabilities can be outsourced.

Ensure detailed job descriptions including required capabilities and responsibilities exist, are aligned and brought to life.

Don’t leave interfaces between functions and/or business units undefined.

DO‘s DONT‘s


25 I

“Our customers always expect spare parts within 24 hours.”

If you feel your warehousing performance cannot keep up with today’s needs, you are not alone. Almost every OEM fights with delivery expectations shaped by Amazon, while there are more and more spare parts to manage.

5. Service supply chain

Optimize spare-partsmanagementFor many OEMs, spare parts constitute the lion’s share of service revenues. Having the right parts available and delivered in time is key. But the segment is also increasingly under pressure. Customers demand faster delivery, controlling staff expects lower inventories, and a growing number of products results in a higher number of spare parts. As a result, challenges in warehousing spare parts have multiplied while warehousing staff is often insufficiently trained and insufficiently motivated.


I 26

Mounting pressures on spare-parts management

Three general trends put increasing pressure on spare-parts warehousing/management for OEMs.

Delivery expectations: With Internet companies regularly delivering very fast, today’s industrial customers expect the same for their spare parts. Additionally, more and more customers are reducing their spare-parts stock and ordering more on short notice.

Increasing complexity: The number of spare parts to be managed has been growing steadily because of a growing product range to be serviced. And due to faster innovation cycles, many manufacturers have an increasing variety of older-generation products on the market that still require OEM support and parts.

Capital optimization: Even though interest rates are low, unnecessary spare-part inventories tie up working capital. Especially in the case of slow-moving goods, maintaining the difficult balance between availability and scarcity is critical to an effective and cost- efficient inventory.

Improving management of warehouse inventories

A key insight of inventory management is that lead time, service level, and capital employed always depend on each other. If two factors have been specified – a customer-defined lead time and an internal limit to working capital, for instance – the corresponding service level is generally pre- determined. In other words, there is little room to maneuver. The answer lies in a careful optimization of processes, both on the input and on the stock-keeping side, to reduce the number of unnecessary items in stock.

5.1 Availability of parts is No 1 purchasing criterium for spare parts

Source: Barkawi 2016; interviews with decision makers at service customers

0

1

2

3

4

5

6hi

ghlo

w

Availability of parts

Speed of delivery

Ease of doing business

Manufacturer lifetime support

Cost Warranty period

5.6 5.34.8

4.2 4.13.6


27 I

On the input side, ordering and buying spare parts must become a process that is largely distinct from the production of new equipment. This is doubly true once an original product has been discontinued and all new orders are for spare parts. Purchasing framework agreements usually try to maximize order volumes in order to gain maximum savings. The same goes for parts produced in-house, where the plant managers will specify minimum batch sizes. But for many spare parts this means order volumes that tie up too much working capital and, especially for low-turnover spare parts, run the risk of obsolete inventories. But getting purchasing and production to comply is difficult, often requiring top-level involvement.

On the stock-keeping side, assortment planning must identify spare-part needs for each region. In addition to historic delivery figures, the assortment should be planned as per aspects criticality – how urgently a customer needs a certain part once it

breaks – and competition – how easily a customer will use alternative sourcing if a part is temporarily unavailable.

Inventories should also be monitored by tracking coverage times. For example, items with a coverage time of one to three months are marked green, items with a storage time of three to six months are marked yellow, and those with a storage time of over six months are marked red. A shortage of green items means that business is being lost; action must be taken to improve supply. Red items, on the other hand, must be put on sale to reduce stock.

Optimizing warehouse footprint and management

Many manufacturers have a service network that has grown over time, often due to waves of acqui-sitions and consolidations. While there will never be a ‘once-and-for-all‘ solution to the warehouse footprint, it can and must be optimized to improve

5.2 Higher service level achieved with less infrastructure – example


From 12warehouses ...

... to 3warehouses

BEFORE AFTER


I 28

the cost-to-service ratio. One European warehouse generally suffices, perhaps with a regional branch in Scandinavia and one in southern Europe to improve delivery times for critical spare parts.

Centralized planning optimizes inventory management for all warehouses. While all regional warehouses stock critical and fast-moving items for their respective customer bases, slow-moving items might be stocked only at the central warehouse. Modern information technology will allow flexi-ble satisfaction of unexpected demand by lever-aging the sum total of all warehouse stocks. Over time, a smart inventory will try to forecast which warehouses should stock which quantities of which items at certain times of the year.

Case study: Agricultural OEM integrates dealers into supply chain

A manufacturer of agricultural ma-chinery had done all its homework as described above. It had an efficient central warehouse, sophisticated parts planning, and top grades in service rankings. It had clearly beco-me best-in-service in its industry. Yet one issue remained. While spare- parts availability was above 96 % in central and regional warehouses, availability dropped to around 60-70 % at independent dealers. Their stocks were full, but with the wrong parts.

Dealers showed inventories with over 50 % of parts not having moved at all in over 24 months.

To address this issue, a parts-excellence program integrated service, the supply chain, sales, and central IT. A new stock-keeping and ordering soft-ware program now helps dealers buy the right spare parts at the right time. In agriculture, no spare part is critical in winter – but often crucial during plan-ting and harvesting periods. Over 500 dealers now participate in this program; their parts availability has risen by an average of 11 %. For the manufacturer, spare-part sales have risen by 10 % and dealer loyalty has improved.

Integrate all stakeholders: sales, warehousing, purchasing, service technicians, customers, and dealers.

Don’t try to please everyone. Find small, practical workarounds instead to cushion negative effects.

Assemble a core team that understands opportunities; work top-down first then detail bottom-up.

Don’t accept an outright ‘no‘ from IT; make a business case and fight for it.

Focus at first on one pilot initiative. Complete it and use the success story to leverage momentum.

Don’t expect everything to run smoothly. Allocate enough time for people to change old habits and adopt new approaches.

DO‘s DONT‘s


29 I

“We cannot manage to offer a consistent level of service in all our regions.”

If your local service heads insist that their regions are absolutely special, they are right. But that does not mean you cannot establish and continuously improve standards in all your markets.

6. Service efficiency

Improve service efficiencyGlobal standards are key to service efficiency. They allow for defined processes that can be better calculated, planned, monitored, and continuously improved. Joint competence centers allow for cost-efficient support. In many cases, even highly customized services can be created by combining modified standard processes.

Efficient service rests on three pillars: good planning, the right skills set, and spare-parts delivery that is reliable and fast. Regardless of whether a service order is placed via customer order, remote-monito-ring data, or a maintenance schedule, facts need to be checked, priorities set, and timetables drawn up and communicated. Standardized processes ensure that the right people are in the right place. The quality of field operations depends on the skills of field specialists and can best be improved by training service technicians, supporting field techni-cians, and controlling. Depending on the issues to be resolved, support can include remote counseling capabilities via mobile devices to professional routing support to save travel time. A fast and efficient spare-part supply chain forms the third pillar of service excellence.


I 30

Global standardization and local adaptation

To achieve efficiency on a larger scale, it is important to define global standards while still permitting local adaptation to meet the needs of local customers. To facilitate this, a central service unit will serve as a center of excellence. It makes service knowledge and standards readily available to all service centers. This enables sharing of best practices and mini- mizes re-inventing the service wheel.

The following example shows the disadvantages of insufficient standardization. A Chinese cellular- phone operator serviced 34 provinces, with several fairly independent sub-divisions per province. This led to more than 100 markedly different service level agreements (SLA) within the device-repair network. The results were a mediocre cost structure and drastically different turnaround times. There were

different service levels in a single province, which undermined the notion of offering the same or similar level of service at all times in all service regions.

To be effective on an organization-wide scale, global service standards should constitute 80 to 90 % of any locally delivered service portfolio. The remaining 10 to 20 % consist of locally customized services. A good example of local services comes from a leading global player in the renewable- energy industry. While customers in southern Europe reported no performance issues at low temperatures, customers in northern Europe were confronted with frozen wind turbines, which especially impacted blade performance. The solution was to offer de-frosting services to equipment owners – but only in countries where this was necessary due to weather conditions.

6.1 Service playbook: Make Service a repeatable business model


ServiceMission

Statement

Service Solution/Catalogue

‘Service- DNA‘

OperatingModel &

Capabilities

ServiceObjectives

Ecosystem & 3rd Party

Financials & KPIs

• Playbook covers service essentials from start to finish

• Allows for global standards with required local adaptations

• Serves as cook book with single recipes for success


31 I

Standards need a playbook

A proven way to implement a common standard is to develop a service playbook, a document that details all standardized services, associated pro-cesses, and respective role definitions. This enables local service centers to learn and adapt standardized services. Especially when rolling out new services in waves across national markets, such a playbook significantly increases consistency across regions.

The case study of a manufacturer of fast-moving consumer goods perfectly demonstrates the effec-tiveness of such a playbook. When the company introduced a new product category, it also developed a service playbook based on two pilot markets. Developing the playbook took more than twelve months, including successful pilots in both markets. The company was subsequently able to utilize the playbook in 15 additional markets, with minor tweaks based on experiences in pilot markets, and shortly thereafter began implementing the play-book in yet another 20 markets. A standardiza-tion level of about 85 % made it possible to bundle customer contacts in a single cross-regional contact center, which resulted in substantial cost savings.

While a company’s global image and service effi-ciency call for global standards, local services must be tailored to individual industries and their needs. With consistency across markets but local adapta-tions possible, OEMs acknowledge that service is a local business and competitive advantages are a function of proximity to customers.

Choose the right performance metrics

Measuring and improving performance is a standard for physical products. Services, on the other hand, often lag behind. The first challenge is often gathe-ring required data. After all, no one is responsible on a corporate level for services, scant specific service data is available, and controlling data cannot show service as a separate category. One common instance of the latter is a new-equipment deal. When a new machine is sold, the deal is sweetened by a certain number of spare parts as a bonus. At most companies the spares get booked as a zero value for sales, which means the costs remain with the service division. This distorts the truth. Margins or EBIT as relevant key performance indicators (KPI), for example, cannot be accurately calculated on a functional or business-unit level.

After all necessary data has been collected, and service can be accounted for separately, service KPIs must be defined. Typically, service metrics need three dimensions: customer metrics, operational metrics, and financial metrics. There are virtually dozens of options; the difficulty lies in identifying the right ones. Depending on the industry, market, and customer base, the set of relevant indicators varies greatly. For example, in the case of service contracts with uptime guarantees, reaction time within minutes is crucial. On the other hand, in a consumer- driven business, the first-time fix rate and custo-mer loyalty measured by net promoter score are key success factors; reaction time might not be particularly important.


I 32

Permanent effectiveness management

Even measuring the right KPIs will not be enough in certain cases. In fact, the means of measure-ment and exact definition are of great importance. A cell-phone OEM, for example, regularly got mediocre feedback from network operators in quarterly business reviews of its services, even though it met all its targets. The OEM reviewed how its clients, network operators, measured performance only to discover that it had been striving for the wrong goals.

This resulted in an adjustment of priorities and yielded two improvements. The results in under-performing areas improved and the resources of

over-performing areas were cut because additio-nal performance was not rewarded or not deemed important by customers. Scores in quarterly business reviews and customer satisfaction then improved steadily.

Measuring KPIs is not an end in itself. It instead needs to be carried out with performance manage-ment in mind. The challenge lies in interpretation of data and taking appropriate steps ranging from ‘no action required‘ to ‘continuous improvement‘ to ‘major change initiative‘. An example would be utilization of service technicians. This is usually quantified by working hours versus travel time – while disregarding sick leave or training, for instan-ce, which should be fairly constant. If the metric

6.2 Measure your service business end-to-end


Financial and regulatory metrics

Strategicmetrics

Rationale• Metrics that mirror operations and performance• Combines supplier and internal operations

metrics as well as the gathering of data aboutthe customer

• Broad set of metrics which allows to drill-downinto various operations and quality topics

Sample of service metrics• Warranty cost to net sales in %• Cost per customer visit• Total cost of poor product quality• Meantime between failure (MTBF)• Service order resolution time

Operational performance and quality metricsAg

greg

atio

n fo

r man

agem

ent p

urpo

ses

Drill

dow

n to

ope

ratio

ns le

vel


33 I

shows a mismatch, further investigation should be initiated. The root cause could be seasonal factors such as weather, understaffing in a region, inex- perienced schedulers or insufficiently qualified technicians. Once the root cause has been deter-mined, a mitigation plan needs to be put in place. This might entail hiring new technicians or setting up a training program for schedulers.

A manufacturer of power generators for renewab-le energy found that it could improve utilization of service technicians by better planning field-techni-cian visits. Planning initially consisted of specifying a type of service, location, and technician. Whenever a certain customer was visited, planning staff checked whether other services or maintenance activities could be per-formed during the same visit. Travel distances and visits per customer were reduced, resulting in large im-provements.

Case study: Minimizing hotline usage

A manufacturer of white goods reassessed its end-customer hotline for service support and made two surprising discoveries. First, over 30 % of incoming calls could be avoided by providing more tailored information so that customers could them-selves resolve minor issues. Second, the resolution of minor issues plays the largest role in customer satisfaction. The manufacturer therefore decided to develop do-it-yourself tools such as e-learning, apps, and social-media solutions. It soon succeeded in significantly downsizing its customer hotline.

Globally standardize your service products and their delivery.

Don’t assume that local service centers will adopt global standards simply because headquarters says they must do so.

Ensure that you are measuring service performance end-to-end, including delivery to customer.

Don’t set up a KPI system that is too complicated. 6 to 12 KPIs will usually be enough; not all of them need to be measured weekly.

Become suspicious if all KPI traffic lights are always green.

Don’t focus controlling on sales and EBIT alone; include quality KPIs.

DO‘s DONT‘s


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“Our service profits are good, but we are leaving money

on the table.”If you feel service earnings could be improved, you are probably right. Very few service organizations systematically optimize their prices for spare parts, on-demand repairs, and ongoing service contracts.

7. Service pricing

Correctly pricing servicesPricing is a powerful tool to maximize service profits and customer satis-faction. Barkawi can help implement advanced pricing processes, based on customer and market in-sights, in global organizations. Our model comprises five critical steps: value creation, value communication, price policy, price structure, and price execution by the sales force.

Setting and getting prices

A better price list is just the first step in gaining control over prices. Barkawi calls this ‘setting the price‘. The next step is to actually get that price in the market. This entails seizing control of the complicated cascade of bonuses, rebates, and discounts that importers, country-specific organizations, branches, and sales agents use. The situation at many industrial companies can be summarized thus: headquarters invests great effort in a price list (‘Set the Price‘) that poorly reflects the market and exhibits a disconnect regarding end prices paid by customers (‘Get the Price‘).


35 I

Pricing the customer value

Shifting from cost-plus pricing to market-oriented pricing means setting prices according to the com-petitive situation, the criticality of spare parts and services, and the sensitivity of customers. If a particular spare part is essential for uninterrupted production throughout a plant, then a high price is often justified. The dire consequences of not purchasing it will significantly increase a customer’s willingness to pay for it. Special services such as overnight delivery and installation of critical spare parts should be priced accordingly.

On the other hand, pricing for non-critical sourced parts must be sensible. Expensive spare parts sourced from another manufacturer – sometimes bearing the name of the manufacturer – will encourage customers to resort to alternative suppliers. Once customers realize this, they will systematically check all spare parts and buy them directly from the original manufacturer whenever possible. This not only diminishes revenues in ser-vice. It also undermines customer trust and loyalty.

Companies with advanced pricing systems will not only know the value their services create for custo-mers, but can also adjust prices based on customer

7.1 Price Waterfall


SET the price GET the price

Production/purchasing

cost

Global price list

Regional price

Net price

Pocket price

Material factor

Dilation and dam-

pening

Market factor

Custo-mer and volume

discount

Invoice difference Bonus

Trans-port

charges

Rebate Emerging charges

CustomerOEM


I 36

segmentation. This often leads to complete service-solution packages of different levels: silver, gold, and platinum, for instance. By varying the spectrum of services, industrial companies can maximize revenues and profits.

Determining the right final price

When people talk about prices, they refer to the final price paid by the customer – not the list price. But in many cases, actual final prices differ significantly and wildly from list prices. A manufacturer of agricultural equipment discovered differences as high as 50 % between list prices and end prices due to a maze of discounts, markdowns, and rebates.

In addition, many sales reps achieved revenue targets by reducing the price at the expense of profit margins for the company. A large publishing house discovered that its sales agents regularly claimed that ads had been not printed correctly and needed to be published again in the next edition – a covert discount of 50 %.

A proven way to turn sales discounts from a margin-cutter into a source of profit is by introdu-cing a strategic and universal discounting model. This should not only define which discount is granted for which product, but also specify who – premium dealer vs. standard dealer vs. importer – is eligible for additional reductions in price. As arule, a discount should not be given in exchange fornothing. A customer might qualify for a discount bysigning a long-term contract, for instance.

Moreover, discounts should be segmented by the nature of the service. Spare parts, for example, can be grouped into wear and non-wear articles. Wear parts are often commodity products which can be sourced from third parties. They should be more heavily discounted to retain more customers for the OEM. Non-wear parts, on the other hand, are less likely to be offered by third parties, and lower dis-counts should be granted to realize higher margins.

The key to success for service leaders is to identify those spare parts that allow for higher margins while granting discounts for those that are com-modities and subject to third-party supplying. A Japanese OEM offers a special service to its custo-mers. Whenever it verifies the functionality of equipment, the company will also inspect non- original spare parts. The OEM thus ensures uptime and boosts customer satisfaction at the same time.

Empowering and motivating the sales force

In order to work in practice, pricing and discounting should be easy for the sales force to understand and apply. After all, salespeople sell to customers and dictate final prices. Even the best pricing strategy will likely fail unless the ‘boots on the ground‘ are committed and capable. Therefore, the sales force must be equipped with the right capabilities, processes, and arguments for ‘achieving the right price‘ in the market.

Service sales must target customers and empha-size solutions. This means that salespeople must


37 I

understand what each of their customers needs and which customer-specific value is created by the products and services sold. This might require special training seminars, where sales agents learn the specific value propositions of their offers that justify a particular price. And it always requires an incentive structure that puts profitability and customer retention above revenue maximization.

Pricing creates or destroys customer loyalty

Experience shows that customers who believe they are paying fair prices will buy their spare parts and services predominantly from the OEM. Proper pricing therefore boosts the loyalty of service

customers. But the opposite is also true! Overpriced services can actively drive customers away, often without the OEM realizing it.

There are numerous examples of OEMs losing all of their service customers because of high prices, despite the latter relying heavily on the OEM. In addition to lost profits, such a change will also significantly reduce negotiating leeway for the next new-equipment sale. Several years ago, a number of Saudi Arabian oil refineries realized that their OEM services had become ridiculously expensive. They decided to terminate all contracts with OEMs and establish their own service provider.

7.2 Loyalty Index – Example


• Non-wear parts face usuallyfew non-original competition

• Non-original parts are typicallyvery active in Eastern markets,quality has a lower value sincelabor is comparably cheap

• Large markets like Germanyand France are characterizedby strong competition on themarket for spare parts

• Northern regions are typicallymore loyal

Rather unloyal

Partly loyal

Rather loyal

Gross sales wear partsGross sales non wear parts

Loyalty =

Germ

any

Russ

iaFr

ance

GB +

Irel

and

Ukra

ine/

Mol

davi

aBe

laru

sHu

ngar

y

Bene

lux

Czec

h Re

p.Po

land

Nor

dics

Balti

cs

Othe

r Eas

t. EU

Sout

hern

EU

Switz

erla

nd250%

200%

150%

100%

50%

0%


I 38

Case study: Spare-part pricing for agricultural machinery

A leading manufacturer of agricultural machinery felt that spare-part pricing was mediocre. All 35,000 items were priced according to a fixed-cost-plus-margin approach, regardless of differences in type of parts or competitive exposure. Even discounting adhered to a uniform scheme. Not surprisingly, externally sourced standard parts were considered too expensive by many customers and had a low market share. On the other hand, existing margin potentials for captive parts remained untapped.

Customer interviews provided insights into customers’ price sensitivities regarding, for example, those parts whose margins could be increased without a negative impact on order volumes and customer loyalty. A new value-based pricing model was introduced that basically lowered prices for simple standard parts while increasing prices for complex captive parts. Discounts for parts drove customers’ overall price percep-tion. This was complemented by a strategic discounting scheme that embodied a value-added principle. The result was a 5 % increase in spare-part revenue and a 10 % in-crease in spare-part profits as well as a measurable boost in customer satisfaction.

Case study: Advanced service-contract pricing for a global technology company

A global leader for visualization solutions found that its growth strategy had led to a number of adverse effects in one of its core businesses. Channel management and service pricing had become arbitrary; large new-equipment discounts also affected service margins.

In order to establish a long-term service-contract business, Barkawi identified six major improvement areas. One of them was an advanced pricing model. Together with clear rules for all customer segments and compulsory service packages for new-equip-ment sales, the company was able to increase spare- part revenues by 14 %. At the same time, the overall spare-part and contract-sales margin rose by 20 %.

Aim for superior value instead of (just) superior products.

Don’t get drawn into a discussion of your economics.

Price value packages instead of service products.

Don’t just react to customer expectations, actively manage them instead.

Justify your prices in terms of customer economics.

Don’t set prices to gain market share or achieve a certain margin. Prices must instead reflect the value they create for customers.

DO‘s DONT‘s


39 I

“We want to deliver world-class service, but do not have the right people.”

If you lack the right talent in your service organiza-tion, the underlying problem is your OEM company culture. It makes for cumbersome hiring processes and renders service people second-rate.

8. People, culture & service transformation

Make service an attractive fieldService is not only a business. It is a mindset; to succeed it needs the right corporate culture. Technology-driven manufacturers usually do not have a service culture: They are focused on innovations, large investments, new physical products, and large one-time sales. Moreover, some employees tend to look down on colleagues who work in service. But with service earning the lion’s share of profits, this organizational mindset must change.


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To become a service leader means to transform the company to better support the service business. Investing in the right capabilities, offering material and non-material incentives to service people, and shifting the service organization from a reactive stance to a proactive one are essential. A success-ful service transformation will require investment, patience, and determination to stay the new course despite headwinds from other parts of the company and the competition.

Getting the right people on board

Service leaders ensure that service operations become an attractive career path for all members of the company. The underlying rational is simple: in order to drive the success of the service business, the best people in the industry need to be hired. This is why flexible, fast, and successful hiring is a must for service. Unfortunately, investment-goods manufacturers usually rely on rigid, long-term decision-making processes suiting the needs of technology companies.

For companies with a service growth agenda, hiring is also an investment process. This investment is a prerequisite for new business. In order to work, this investment must be handled flexibly in accordance with current hiring/business opportunities. That means that local hiring authority must be granted to service centers. Experience shows that a new service employee will need an average of nine months to work efficiently.

An industrial-goods manufacturer wanted to launch a new premium service in a pilot market. The first step was to determine how many service technicians with which expertise would be needed to deliver the new premium service. HR gained a thorough understanding of the task and created an attractive package to recruit, hire, train, and retain service technicians. A new career path in service was thus introduced. This HR response ultimately ensured the pilot’s success.

Developing service teams for more efficiency

In order to proceed properly, HR must develop a good understanding of the precise tasks to be performed in service. It often helps if HR staff spend a day in the field with a service technician or handle some supervised calls at a call center. The required skill set of service employees usually goes beyond technical expertise to include people skills for dealing with customers and a basic business acumen. These soft skills might include the willing-ness to go the extra mile to fulfill a special service requirement for a valuable customer.

Therefore, acquiring and expanding specific skill sets should be fostered and participating emplo-yees rewarded for their efforts. As equipment is constantly being upgraded and advanced, service employees need to engage in a continuous learning process regarding modifications and new service offerings. This can be achieved by in-house training courses or by setting up a ‘service university‘. Intranets or special tablet apps supply news and


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best practices, which is especially helpful in commu-nicating with service technicians.

A German manufacturer of wind turbines had to provide an electrician for every service team; only an electrician was allowed to shut down the turbine, a prerequisite for all maintenance work. This unneces-sarily inflated team size for all cases requiring only mechanical work. Once HR realized this, it started training all mechanics to shut down the equipment.

Transforming a manufacturing company

Having service career paths in place is only the beginning of a larger transformation, provided that the service arm is to remain a part of the company (see Chapter 4). Many industrial-goods manufac-turers already have a ‘razor-blade business model‘. They sell new products at poor margins so that they can sell services and spare parts at good margins. Yet such companies still act as if revenue came from its new-product sales.

A service transformation ought to sustainably shift the focus of all employees from equipment sales to understanding and embracing the service business. It is a difficult undertaking that will require long-term and highly visible support from executives. If 50 % of profits are to come from service, then 50 % of all board meeting time should be devoted to service. Service also needs to be regularly emphasized in company-wide communications to educate staff about service and encourage them to think in terms of service.

An important prerequisite for creating a service mindset lies in establishing a solid base of suppor-ters early on. Once service starts to become the new hero and earns recognition for profits, some people will not seem as important as they used to and they will oppose the transformation.

Especially when it comes to global manufacturers with different product segments, several service branches, and a widespread sales force, winning

people over can be par-ticularly challenging. A great example of rewar-ding service supporters comes from an auto-mation manufacturer. The CEO openly rewar-ded the company’s best service promoter with a brand-new motorcycle.


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Case study: Turning a loss-making service unit into a profitable company

A large conglomerate wanted to shed its loss- making customer-care unit for cell phones. Barkawi founded a spin-off that assumed existing employ-ment and warranty obligations.

The challenge was to build a worldwide network of repair/service centers within a very short time. Tasks would include receiving, diagnosis, triage, repair, logistics, and spare-parts management. This challenge was mastered by a clear vision and targets, a young and pragmatic leadership team, a strict strategy regarding partners, and a lean organization with a culture of self-responsibility. By becoming a universal service provider for consumer-electronic devices, the compa-ny profited from economies of scale.

Today, after nine years of opera-tion, a large number of electronic- device producers, electronic retailers, cell-phone providers, and insurers of consumer electronics rely on the company to provide warranty so-lutions and repairs. Said company employs more than 700 people in 35 countries and offers mobile-device services via partners in 100 countries around the world. It handles seven million repairs annually and offers technical support in 30 languages.

Service is a mindset. Encourage service-centric thinking throughout the organization – including the traditional equipment business.

Don’t forget that capabilities are the reason customers buy your services. Make regular training an integral part of your service organization.

Create attractive career paths for service. Make experience in service mandatory for trainees and young executives.

Don’t underestimate resistance to a strong service arm in your business. Service transformations need to overcome passive resistance and even open hostility.

Allow for different HR processes in service. New service positions need faster approval and streamlined hiring processes.

Don’t forget to change the agenda. Service considerations should constitute half of board meetings, half of in-house newsletters, and half of all press releases.

DO‘s DONT‘s


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“We still need to adapt our service offerings to

the Internet age.”If you lack a clear vision of what your service organization should be ten years from now, you are not alone. With big data and cloud services on the doorstep – and the Internet of Things and 3-D printing on the horizon – it is hard to say what tomorrow’s vision of service will be.

9. Technology & service opportunities

Foster service innovationsInnovations do not arise exclusively from new technologies. They can also be triggered by changes in customer needs or business trends. A success-ful service offer continuously responds to changing technical and business environments. Service innovation is not only about new types of services. It is also about facilitating sales and delivery, adapting to new customer needs and expectations, and making your field forces more efficient.


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Leading in service usually entails leading in service offers, too – or being quick to copy and improve the new offers of competitors. But truly inno-vative services set you apart in the market and help establish a unique selling proposition. In competitive in-dustries, you will go backward if you aren’t going forward. Today’s custo-mers expect their service partners to regularly and pro-actively develop new-and-improved service solutions. They want to work with innovative partners. This means that innova-tions can improve customer loyalty.

For many OEMs, service innovation remains a BIG WORD

Typical OEMs are engineering compa-nies. They know how to put technology in their products, but they are at a loss when it comes to using technology or trends for service innovations. This is partly due to the fact that the oppor-tunities and implications made pos-sible by broad innovative trends are unclear for service staff at OEMs.

Autonomous driving is a good example. Everybody has heard of it because the media reports on it frequently. It theo-retically offers huge potential for OEM services if only for spare-parts delivery.

Technological innovations such as augmented reality represent a great opportunity for OEMs to develop new products and drive down their costs. The downside, however, is that entry barriers are more and more disappearing and new players find it increasingly easy to enter into existing markets.

An example is the ability for new market entrants to offer maintenance for complex machines – simply by using smart helmets that guide technicians through every step required to perform a particular service.

Copyright: DAQRI


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However, it is not yet clear to many OEMs how the technology might be utilized going forward. Less clear still are possible applications and uses of artificial intelligence.

But expert systems might soon help field techni-cians solve problems or assist in finding optimal shop-floor configurations. And even technologies that seem frivolous now, such as Google Glass, might one day find their way into OEM services.

Four success factors for service innovation

1. Start your product development with clearservice targets in mind and keep serviceentry points as proprietary as possible.

Many OEMS develop a product and equip it with sensors. Data is then collected and analyzed. And only then does someone start to think about a service solution for this product – but is now too late. Especially for products with long development cycles, service should be considered early in the R&D stage. More specifically, for each product in development targets for service opportunities should be identified and kept in mind during product development. The entry points for service should be proprietary whenever possible so that it is difficult for custo-mers or third-party service providers to service your products. Once such an entry point is open, it is hard to close it. A manufacturer of specialized projectors learned this the hard way. It opened the diagnostic interface of its new product generation to customers, dealers, and service partners. The manufacturer was

soon confronted with a steep drop in demand for its remote services such as status monitoring. If inter-faces must be opened, as with power plants, then a clear data strategy and contractual stipulations can still assure a good service position for the OEM.

2. Keep equipment-status information updatedand merge your data sets to facilitate a uniformservice approach.

Almost all OEMs try to collect customer information to gain an overview of their sold equipment. But many companies lose that information once the product is re-sold to another customer. Equipment with online capabilities – which will only become more common in our ‘Internet of Things‘ future –should be built such that customer changes are registered automatically.

Also, certain equipment-status data should be registered automatically and included in the data set. For example, built-in components should have their own identities. If they are replaced, then data should be updated accordingly. This will enable much better targeted service offers such as selling update packages to all customers with out-of-date components. Internally, data should be linked instead of being in several different places. Different departments that have the same customer should use the same data set to enable a ‘one face to the customer‘ approach.


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3. Make IT a core competency and fostercontinuous investments.

Whatever future service innovation will look like, one fact seems certain: the amount of data to be processed will grow and the role of the IT backend

will grow in importance. While this is true for an entire organization, it is especially important for service. On the one hand, data will be the basis for all predictive maintenance and much commu-nication with customers. On the other hand, data will allow service technicians and sales specialists to draw from a large database covering every type of equipment, issue and sales opportunity. For example, data can help technicians access

problem-solving tools on tablet computers; this requires a well-integrated backend. Taking your IT to the next level – and then to the next – should become a continuous process, backed by ongoing department development as well as the willingness to keep investing in new hardware and software.

4. Initiate a change process towardan innovation mindset.

Especially service employees with years of experience might resist pay-ing attention to innovations they consider ‘too far away‘ as described earlier. To ensure their support, a pro-fessional change process is required. They need to appreciate the willing-ness and need to carefully develop service offers.

Service staff also needs to be trained to be on the lookout for possible op-portunities. Regular workshops in the future of service can open their minds

to untapped service opportunities. Not all service divisions will become as innovation-driven as Tesla or Apple, but every step in the right direction is valuable. As other innovation-culture projects show, hands-on executive support and continuous communication are needed for a real impact. Another hurdle to overcome is the acceptance of service innovations in the field. An OEM met severe resistance when it tried to introduce a

9.1 Devices connected via internet globally (# units in bn estimated)


3.03 3.754.88

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Automotive sector

Consumer sector

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technician-routing system on mobile devices to save travel time. But once technicians were involved in developing a finder for demonstration gear, the routing system was accepted. Testing and fine- tuning of service innovations should be done in pilot projects, or with the help of in-house incubators.

Now is the time!

For now, Service 4.0 is but a vision. Neverthe-less, many companies have already started wor-king on it. The fewer proprietary spare parts you have and the less unique OEM knowledge is needed to compete in your service field, the higher the risk of being overtaken by your competitors – or companies not even on your radar screen!

Digitization will quickly re-write the rules and threaten to disrupt many business models. Just stop to consi-der connectivity coupled with mobile devices – and the worldwide success of Uber. And now consider what Uber could become when connectivity and mobile devices meet autonomous vehicles …

Monitor the service moves of competitors and be ready to react quickly. A copycat approach is better than being left behind, especially if you can improve on it.

Don’t neglect the power of IT technologies to improve service operations.

Make service innovation an integral part of all R&D processes. Develop your products to support innovative services.

Don’t limit service innovation to strategic and R&D departments. Some of the best innovations originate in the field.

Foster innovative thinking throughout your service organization. Executives should encourage it.

Don‘t jump on the bandwagon for every potential innovation – focus!

DO‘s DONT‘s


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10. This is BarkawiBarkawi Management Consultants is an internationalmanagement consultancy for after-sales and servicesupply-chain management. We employ over 100 specialistsat our offices in Munich, Shanghai, Moscow, Atlanta, andVienna. Many of our clients are global, capital-intensivecompanies with complex supply chains.

“We want specialists for service strategy

and operations“If you are looking for consultants that share your passion for After Sales & Customer Service and know what makes service business special – not another consulting generalist – Barkawi is your partner.


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“We not only develop strategies and concepts; we also turn PowerPoints

into results and money for and with our clients.“

A unique combination of consulting and active assistance in operational implementation makes Barkawi special. This approach ensures success on the shop floor. We take on the role of a project engineer: supervising and guiding implementation as well as lending a helping hand whenever neces-sary. We consider our job done only when daily operations are running smoothly.

We blueprint, pilot, and set up innovations such as:

• Boost service business: accelerates servicerevenues by factor 2 – 3.

• Operations control tower: enables end-to-endtransparency throughout the supply chain,including suppliers for a smartphonemanufacturer.

• After-sales service setup for product launch:provides service for a new consumer- electronic product. Several Barkawi consultantsheld interim management positions to allowfor rapid global scale-up.

• Managed dealer inventory: empowers over150 dealers and distributors of agriculturalmachines to better balance and manage theirinventories. This solution is operated entirelyby Barkawi.

Barkawi is not only an implementation-focused consultancy. We are also entrepreneurs. Our know-how and advice ensured that many business solu-tions came to fruition over time, resulting in today’s Barkawi Group. Consisting of seven companies, Barkawi operates in a wide range of industries and employs some 1,000 people in 30 countries. One of these companies is B2X Care Solutions, a provider of end-to-end after-sales services to OEMs, carriers, retailers, and insurers.


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Barkawi Management ConsultantsBarkawi Management Consultants GmbH & Co. KG Baierbrunner Str. 3581379 MunichGermany

Phone: +49 89 749826-0Fax: +49 89 749826-739

[email protected]

Barkawi Management Consultants is part of the Barkawi Group. Carena and Karim Barkawi are CEOs of the holding.

Awards 2015

DisclaimerData contained in this document is not binding and serves information purposes only.

Liability claims filed against Barkawi Management Consultants GmbH in relation to material or intangible damages resulting from the use of this publication shall be principally excluded.

© 2016 Barkawi Management Consultants GmbH. All rights reserved.

Image rights:

Fotolia: Pages 12, 19, 25, 34, 39, 43iStock: Pages 1, 4, 7, 29, 41KONE GmbH/Jeddah Economic Company: Page 6DAQRI: Page 44

Awards 2015


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Supply Chain Management

‘The interaction between different companies in the supply chain is becoming more and more complex and frequently embraces the entire globe. We help you bring transparency to the extensive actions of your supply chain: with a clear view on decisions concerning location, suppliers and the right IT system as well as forecasts on sales volume and scheduling of employees.‘

Wolfgang Schürholz Managing Partner [email protected]

Operations Excellence

‚For many companies, process optimization is iden-tical to operations excellence. However, this is not sufficient: For us, operations excellence means that after a substantiated analysis of the whole organiza-tion the operational levers are actively and positively influenced. For those who want to lead their busi-nesses to sustainable success need to foresee waste and its elimination, not contain it after the fact.‘

Alexander Nedelchev Managing Partner [email protected]

After Sales Services

‘In times of decreasing revenues from the new product business, excellent aftersales service is particularly important: binding customers over the long term through smart and innovative service and maintenance offerings, increases sales and profits. But what is the long-term competitive strategy for the after sales business? We help you build an effi-cient service organization, including cost-optimized spare parts logistics.‘

Oliver Bendig Partner

[email protected]

Tools & Technology

‘The supply chain is constantly evolving, creating a critical need for transparency. True transparency requires thorough analysis and integration of many data sources. Put a stop to number columns for the IT team or inaccurate Excel evaluations completed by interns. Multidimensional analyses and the develop-ment of large, one-time databases to improve your supply chain is our daily business.‘

Dr. Andreas Baader Managing Partner

[email protected]


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Developing the service business is a very attractive opportunity for most industrial goods companies – but one that remains largely underexploited. However, performance within this sector is impressive: Services generate between 20 % and 25 % of revenues for many European industrial goods manufacturers, accounting for half of the sector’s profits and growing steadily at 5 % annually. Even so, considering the full potential of their installed base, industrial companies typically reach only 10 % to 25 % of their service revenue – and many companies don’t even know where they stand regarding their full service potential.

The study ‘After Sales Services – The Quest for Faster Growth and Higher Margins‘ is a pragmatic and action-oriented guide on turning opportunities into results. It introduces practice-proven steps for building a more efficient and profitable service business and describe the successful transition to becoming a customer- focused service champion – a challenging endeavor, but one that offers great rewards: Depending on the industry, an effective service line can generate more than 50 % of your revenues. To exploit the untapped potential, this study serves as a guideline that covers all aspects from strategy to implementation. In an increasingly challenging economy, service remains one of the biggest growth opportunities for the industrial goods industry – one that shouldn’t be left to competitors.

Barkawi Management Consultantswww.barkawi.com



Documents

A Guide on Turning Opportunities into Results - Barkawi · I 2 Authors A special thanks to Jochen Lehman, Service Manager at BMW AG and Fabian Reusch, who have been critical contributors