Companies frequently review their approach and discuss how to become more explicit and attentive to their customers’ needs. Almost always this leads to a discussion about services. Service organisations represent the customer and the customer operations better than most other parts of the company due to their closeness and local presence and are therefore a natural path to a more customer-oriented approach. So does the key to improving overall business lie within a successful service approach and is it fair to say that “service-oriented” means “customer-oriented”?
- Investment plan for the future
- Focus on productivity and not headcount
- Installed based intelligence
- Transparent accounting data
- Balanced R&D investment between products & services
- Attracting the best people
Perhaps. Phrased in another way, a service-oriented organisation includes all parts of a company able to see the customer dimension in everything they do and take decisions and set priorities accordingly. When successfully done, all parties understand how to coordinate and link their respective agendas. But what does this mean in practice and what are the tangible signs of progress in broadening or transforming your business model to become genuinely service-oriented?
In order to be as reality based as possible, let’s list some specific approaches and actions that can make change visible and look at how signs of progress can be identified, measured and understood in the context of managing your service business,
- Investing in service ahead of the curve
- Focusing on productivity, rather than headcount
- Acquiring superior installed base intelligence
- Avoiding cross subsidies between equipment and services
- Balancing investments between service and equipment (product) development
- Service perceived as a great place to work, attracting the best people
The above are only examples, however they all strongly demonstrate commitment to service and are experienced by most organisations actively trying to drive a service business forward.
Investing in service ahead of the curve
Service is very much about people and skills. It is also about relationships and trust and it’s about thorough customer understanding.
To build a sustainable foundation of competences both in the front-end and the back-end, a detailed development plan is required, covering both individuals and teams. The plan would ideally reflect the level of existing v desired capacity and will eventually capture both the quantity and the quality of the team.
In executing this plan, you could be looking at a minimum competence development time of 12-18 months for operational roles and 18-24 months for broader managerial roles. Whether promoting internal staff or recruiting externally, a planning horizon of more than 12 months is needed. With this in mind, whilst trying to have the plan approved, attention must be paid to the fact that the cost of hiring and training is immediate and cannot typically be offset by sales until this expertise is ready and chargeable, realistically 6-12 months later. This could in turn adversely affect the timing of profit & loss of the services business and consequently prevent you from implementing your people plan. Depending on how far you have come in building your team and getting it ready to manage business growth and customer expectations, a careful consideration of allowing early “over-recruitment” is needed.
This is a concrete example of how a company can show its commitment to service and accept short-term additional costs to capture long-term gain. In other words, treating the people plan as an investment rather than an expense is important to consider, even if the accounting principles would suggest otherwise. Once the plan is approved, it clearly anchors the commitment by the company to building a motivated and capable service team.
Focusing on productivity, rather than headcount
The service organisation is often one of the most populous departments of the company and every time justifications of headcounts are on the table, the spotlight will shine brightly on the service organisation. When addressing headcount, staff cost is an inevitable ingredient and seen in the context of business status and aspiration, a discussion around adjustment (i.e. reduction) of headcount is hard to avoid.
To debate headcount of the service team, especially relative to other teams of the company, it is essential to know that staff costs are often categorized as allocated and non-allocated, indicating the different levels of financial recovery of a person. In other words, the recognition that a service “head” may very often lead to an invoicing opportunity, must be as clearly understood and appreciated as the cost of hiring or keeping a “head”. If companies were fully aware of this fact, a more healthy discussion could be held around productivity improvement. There are always better and smarter ways of doing things, including finding opportunities to do more with less. But it is essential that the headcount debate is held in the context of how successful the service business has been or is expected to grow and that the financial surplus generated through the service business is, at least partly, reinvested in service. The risk is otherwise that the growth of service is offset or negated by decline or stagnation in product businesses and all are hit with blanket percentage headcount reduction requirements. This may be effective in reducing costs in the short-term but long term would have an adverse effect on service and the company in general.
A service-oriented company will ensure that critical mass in service is maintained and will recognize that “building people” is not as quick as building machines. It will set an ambition to find ways to smooth business cyclicality, depths and troughs and take a longer perspective to headcount.
Acquiring superior installed base intelligence
A service portfolio is to a great extent based on the equipment supplied or to be supplied, where new equipment represents a small portion of the total installed base, sometimes less than 1%. This is part of the environment, in which decisions and priorities are set when building a services roadmap. A successful service business is characterized by being equally good at supporting new equipment as it is at supporting existing installed base. It’s important to be able to manage this potential complexity, especially if other parts of the company are focused more on new equipment.
New equipment is well known as it is fresh-off-the-line, however what does it take to know your installed base, sometimes as old as 20-30 years or more? First of all it is necessary to decide what should be in scope: Should it be everything you sold to the client or should it be limited to what you as a supplier manufacture? In other words should it exclude third party equipment or should it even take into consideration adjacent equipment needed for the customer to run a successful production?
Once this is done, the level of detail you need to know in order to deliver a customer oriented service portfolio must be established. In other words if you, for example, see benefits in selling upgrades of existing equipment, you need to know how this equipment was produced, configured, maintained, improved and operated in order to successfully supply an upgrade kit. This will include the original BOM (Bill of Materials) or the “DNA” of the machine(s) and must be complemented with a way of monitoring this BOM throughout it’s/their lifetime. This is truly a challenging task, one that has many dependencies and could potentially be a costly exercise. A way to address this in a sustainable way is to decide, as a company, that knowing your installed base is critical for a successful service business and must be reflected in the overall business plan of the company allowing all to be aware of their role in contributing to this important information.
Avoiding cross-subsidies between equipment (product) and services
Accounting rules are (painfully) internalized, but designed correctly, will incentivize a consistent and professional behavior. These principles are helpful in driving your business forward and will help you benchmark, analyze trends and so on. It is important when managing the structure of the accounting system that it completely reflects the business model of the company in order to induce the required behavior.
Despite this one can see, even in the most rigid environments, that getting full conformity to the rules is hard and every so often, casual interpretations end up impacting the business negatively.
As an example, following the excitement of a customer visit aimed at selling a piece of equipment, it is not unusual to try and boost the offer by e.g. including services in the deal. In the heat of the moment this could even be done at a reduced price. Commercialising this scenario, the revenue could end up being allocated to the equipment business whereas the cost of delivering the same service ends up burdening the services business. The result is an unbalanced P&L. This is obviously a simplification of reality but seen in its rightful context, cross-subsidization is real and could, long-term, be harmful to the service business. The effects are not only financial but could influence working relationships where both colleagues and customers are confused about who are responsible for what. It is therefore crucial that a company states accounting, revenue and cost allocation rules clearly and monitors adherence, allowing the organization to focus on what is important, serving the customer.
Worth keeping in mind is if you would like to change the way allocation is done it is probably limited to a financial year, in other words, if you find the accounting rules for any reason incorrect, you are limited in changing this until the end of a financial year. This underpins the importance of “doing the right thing” even if loopholes still exist.
Balancing investments between service and equipment development
It goes without saying that the development budget is one of the largest expenditures of any product driven company. The size and content of this budget should consequently reflect the level of competitiveness expected of the company as a whole as well as of the individual products being developed. It is a “no-brainer” to state that developing advanced equipment, machine platforms, new technologies and similar are likely to represent the largest portion of the development budget. A smaller portion of the development budget is what can be labeled, Life-Cycle Management (LCM). These are activities mainly supporting the installed base with e.g. technical support, warranty improvements, upgrades and so on.
The total development budget is often capped as a percentage of sales to avoid costly surprises. The size of the LCM part is more difficult to estimate and will instead be set in relation to previous year’s spend or linked to particular activities and programs requiring an injection of cash. Any spend within the development budget could potentially be supportive to service. To ensure that service is not only given what’s left when the big spenders have received their portion, it is critical to agree on what premises a service development budget should be set. Helpful to keep in mind when planning the service development spend, is that development time of service products is relatively short, availability of these new products is high and global reach is fast. This is an attractive prospect, leading to a relatively quick return on investment (ROI). Taking these points into consideration, it should be recognized that money spent on identifying and developing new services make best possible use of development spend.
A service-oriented company takes a proactive approach to service development and is prepared to challenge the investments in equipment development, paying visible respect to the potential of new services.
Services perceived as a great place to work, attracting the best people
In service organizations, traditional roles such as service engineers, technical experts, project managers, service managers and similar have over the years been complemented with a horde of new roles such as business development, service marketing, product development, key account management and communications, mainly focusing on supporting and developing the service business. Simultaneously companies have restructured their teams and escalated many service positions to senior management levels, recognizing the positive impact service can have on the overall success of the company. The opportunities for working with services and driving a thriving service business forward has never been greater. And it has opened up new playing fields for professionals looking with anticipation and curiosity at how their careers will evolve and what they can do to influence and succeed in their career choices.
Assuming this is true, when you are trying to fill a vacancy of a marketing, commercial, financial professional or a senior director position in your service team, are you likely to get crowds of applicants, propped with documented experience and trained in the right areas or will you struggle to find suitable candidates? Do the candidates really see the perspective, a successful service career can offer, is the formal recognition and the benefit package similar to that of traditional product lines and will you find sufficient development opportunities to grow in the role? If awarded with suitable talent and true passion for service, it is easy to answer yes but if the organisational environment, company culture, strategic direction etc. cast any doubts on your long term chances of success in a service career, you might hold back and wait for that perfect job vacancy elsewhere.
If you are a service-oriented company you will ensure that staff working with services business has the same weight and the same value as teams working with other businesses. Having a solid background in working with services, should open up new career opportunities, very much thanks to its value based business dynamics, consequently adding weight to your CV. This will assist many potential colleagues and candidates to take the step and join the service team.
In summary, if you are serious about building a successful service business you have to be aware of the sometimes subtle but important ingredients needed to create the right atmosphere in the organisation for this to be realized. It can take time before all parts are in place but with conviction and awareness around both the pitfalls and opportunities your chances of succeeding are far greater.
Dag Grönevik is a consultant focusing on international service management and service transformation, strategy, operations, business and organizational development. An expert in business execution, Dag’s particular interest is in helping clients adapt their service strategies to grow faster in local markets, adjust their approaches to different cultures and maturity levels, implement world class operations and get the best out of people all over the world. In a career spanning three decades in leadership positions at Tetra Pak and Sidel, he helped build those companies’ service businesses into formidable global operations. Dag has worked in Australia, UK, Russia, China, Italy, Sweden, Thailand – as head of Tetra Pak’s service business in South and SouthEast Asia- and Switzerland, where he was head of Sidel’s global services business.