In the latter part of the 20th century, as manufacturers began to grapple with profitability and differentiation in the face of competition from emerging markets, customer-focused service as part of a total market strategy began to emerge as a trend among industry leaders.
As early as 1988, managerial consultants Vandermerwe and Rada recognized this gradual shift towards bundling service and support along with core product offerings by naming it “servitization.” In their article, “Servitization of business: Adding value by adding service” for European Management Journal, the authors urged the manufacturing industry as a whole to adopt this new business model in order to stay competitive, increase customer retention, and differentiate themselves in the market.
As servitization strategies have evolved and grown over the years, so too has its profitability. In The Service Council’s (TSC) Research Summary, 2016: 5 Major Transformations Impacting Service Businesses, 72% of the organizations that responded say they are either transitioning to, or already operating their service operations as profit centers.
This conversion of service from cost to profit over the last decade or two has occurred because companies have realized that service-as-profit can be a significant source of revenue, rather than relying solely on product-for-profit. In fact, a TSC report finds that service profits equal or surpass product sales for virtually two-thirds of the manufacturers they surveyed. Many of these manufacturers reap the rewards of servitization by implementing improved processes and technologies aimed at enhancing current customer service offerings. Improved profitability is another “principal motive” behind added-value services among 46% of respondents in Barclays’ 2016 Manufacturing Report.
At the core of both improved services and increased profitability lies preventive maintenance programs tailored to support specific products. These regularly-scheduled maintenance agreements—also known as service contracts—hold the key to unlocking many valuable treasures for both customers and manufacturers alike.
Along with satisfying customers’ growing demands for holistic solutions to their problems beyond merely buying a product, service contracts benefit manufacturers by:
• creating predictable and repeatable revenue streams
• reducing costs
• boosting revenue for services rendered
• forecasting manpower needs
• solidifying customer relationships
Let’s take a closer look at each of these benefits.
Predictable Revenue Bears Repeating
Service contracts increase top-line revenue in a way that is predictable and repeatable. Leading manufacturers offer their customers these on-going, scheduled maintenance agreements to create regularly reoccurring cash flow, while keeping equipment humming and customers’ faces smiling.
This predictable revenue grows exponentially with each additional contracted client, and allows the organization to accurately project scheduled maintenance profits for the month, quarter, entire year and beyond in the case of extended service contracts.
Example: XYZ company manufactures ultrasound equipment, and sells 20 units to a hospital. Their service agreement dictates that XYZ will not only conduct periodic inspections and calibrations on each of these units, but provide guaranteed tech support as well. XYZ charges an annual rate for this service that is billed monthly, with a contract lasting two years. Multiply this amount by the 30 hospitals XYZ has similar agreements with. In this scenario, XYZ has built a high penetration rate of service contracts into their customer base, affording them a predictable revenue stream month after month, for the next two years.
Reducing Costs With Service Contracts And Technology
Finding ways to reduce costs is an important strategy in any company’s top-line profit playbook, and for field service, efficiency is the name of the game. Towards the end of the 20th century, emerging technology began to offer ways for larger organizations to schedule their field technicians optimally. Today, robust technology solutions help service organizations manage complex service contract programs across their enterprise easily and efficiently.This advanced service contract management software runs all phases of contract fulfillment from start to finish. Customers are more satisfied, while manufacturers optimize their resources, streamline their processes and, ultimately, cut costs.
One area in which this software can help reduce costs is travel time. Here’s how:
• Travel time is managed efficiently. Intelligent scheduling software plots the most efficient routes and timetables using predictive-travel technology, and based on existing service contract demands.
• Reducing the number of miles techs travel in between service stops turns wasted windshield time into billable wrench time.
• Techs are able to service more contracts per day/week, thereby saving the service organization money in gas and other related travel expenses.
Boosting Revenue For Services Rendered
Today’s customers have become active drivers of the service lifecycle. Their expectations of both products and customer service have grown. They require companies to provide inventive ways to help them reduce their total cost of ownership (TCO) on any product or piece of capital equipment they purchase.
Service contracts provide these customers with discounts or incentives to purchase additional time and materials they wouldn’t normally get without a contract. This opens up new revenue opportunities for service organizations by selling pull-through products, additional parts and other add-on offerings.
Keeping track of these up-sells—and invoicing promptly—can be challenging, however, without the help of automated tracking and invoicing software.
In the past, techs would have to manually write down the part (hopefully getting the part number and details right), then generate paperwork that would (eventually) get over to the billing department who would then key it into the system, proof it, and sent through snail mail to the customer.
Today’s service contract management software virtually eradicates human error and billing delays. Invoicing technology can correct errors on data recorded and generate/send orders to accounting before the tech leaves the worksite.
Billing and payment becomes more accurate and fast for everyone; invoices are generated as quickly as day-of-service or the day after, and customers receive digital invoices and receipts—which all result in companies getting paid faster.
Forecasting Manpower Needs
Let’s take a look at XYZ company again, and how service agreements help them predict manpower requirements. For every service contract they have, XYZ knows in advance what specific work needs to be performed on the equipment they sold to their contract customers. They also can predict how many hours this maintenance will take for each unit. XYZ can now accurately plan out how many tech hours are needed to fulfill those services over the course of each contract. While maintenance contracts can’t predict emergency manpower needs, they do give service organizations a qualified baseline of anticipated personnel allocation.
Service Contracts Build Customer Relationships
According to Aberdeen, resolving issues while enhancing the long-term relationship with customers is “the wave of the future” in field service. Service contracts provide a unique opportunity to do just that: provide excellent service to fix problems and avoid potential ones, while cementing a solid relationship with the customer.
A customer who has purchased a product with no contract is essentially a free agent. They may call the company that sold them the product when a repair is need, or they may not. What’s stopping them from trying another company—or several—before they find someone they believe gives them the service they want? Between the internet, referrals, advertisements, and customers churning between service organizations, companies stand a very good chance of losing that desirable on-going service revenue along with any additional time and materials profit. What’s worse, they squander the opportunity to become that customer’s trusted advisor—the first person called when something goes wrong. Probably worst of all, they run the risk of losing that customer’s business altogether (product and on-going service) when the time comes to replace that product.
Get The Competitive Edge With Service Contracts
To sweeten the service contract pot even more, consider the competitive advantage.
Customers need solutions. Service organizations that offer robust service contracts give their customers a feeling of security with attractive features such as discounts on parts and labor rates, inspections, preventive maintenance and possibly even free emergency service. With unique and appealing maintenance plans, service organizations will make it easy for a customer to choose their product and service over a competitor’s flimsy (or non-existent) long-term service agreement.Learn more about software that offers all-in-one service contract management capabilities. Image: Flickr
Manufacturers Look To Service For Revenue Growth, Predictability by Mike Pandl