Based on the reasoning described in Part 1 of this article, we can conclude that for collaboration to make business and economic sense, in particular for smaller and medium sized companies such as most of those operating independently in technical / industrial (after sales) service markets, it must help make those companies more competitive, in terms of both cost reduction and value creation capability. In addition, it should help them expand the market opportunity.

Before looking into the specifics of how this can be done, let’s briefly examine the structure and dynamics of the market in which independent service providers (ISPs) operate -in broad terms: servicing/maintaining, sustaining and sometimes operating the installed base.

The overall market is big: The installed base (however measured), is usually a few orders of magnitude larger than annual new product sales. Assuming anywhere between 3-8% service/maintenance expenditure p.a. relative to the notional market value of an industrial asset, means therefore that the “after” market is significantly larger than the market for new sales or installations.   A major share of the market (approx. 70+%) is controlled by OEM’s (or service units of OEMs) and diverse large engineering/construction contractors and “hard” facilities management providers, which, for different reasons, have moved into the space.

ISPs become more evident, as services become more equipment centered -they are essentially niche players in a broader market, basing their competitive position primarily on cooperation with OEMs, which provide access to product and product knowhow, spare parts and technical information as well as customer proximity. As OEMs increase servitization (broaden, deepen offerings and intensify efforts to internalize service revenue), this relationship will be stressed, while competition from the other big players will also strengthen -as their profitability is linked to scale. ISPs must therefore think of and strategize a competitive response.

At this point we should also consider why equipment focused service providers are relatively small (as a rule, though with exceptions):

  • The market has low barriers to entry: It requires little investment in product development, distribution, working capital or capital equipment. Hence it tends to be competitively more intense. For each OEM offering a product, there are bound to be numerous companies servicing it.
  • The market has been fairly local in nature (though this is changing). This was derived from the need to be close to customers, understand them well and provide fast and credible response.
  • The nature of the business has been craft-like with high labor intensity. It has therefore been characterized by high variable (and relatively low fixed) costs. In other words, revenues drive costs, as labor needs to be added to execute additional work. Such businesses do not scale easily, nor is the pressure to scale as strong. In contrast, businesses which are driven by high fixed cost investment must scale quickly in order to amortize the investment by spreading it among many customers or orders. Such investments may be in processes, fixed assets or working capital.

Note: Technology based servitization efforts by OEMs, which are substituting capital (automation, IoT – fixed cost) for labor (variable cost), are changing the nature of the business making it easier to scale while progressively dislodging craft-like operations.

Given therefore the structure and dynamics of the market and the changing nature of an ISP’s business, how would collaboration help these companies negate the disadvantages of size and make them more competitive or open up new market opportunities?

Collaboration can expand the business scope of individual collaboration partners, provide better market coverage, improved client access or stronger bargaining power. However, its strongest competitive impacts are i) through sharing and ii) through collaborative value creation.

Regardless of the controversy surrounding the term, sharing economy applications can today be experienced in many market spaces. Uber and Airbnb are prime examples. The key economic impact of sharing arrangements is the increase in utilization of assets (vehicles in the case of Uber, housing facilities in the case of Airbnb) and the corresponding decline in “deadweight costs”, or costs associated with underutilization. It is easy to expand the understanding of these “assets” to include labor and technical pools, equipment and facilities, as well as intangibles such as systems and processes, accumulated knowhow and data.

At the same time cluster theory (see Part 1) explains how collaboration enhances value creation: through peer pressure which enhances momentum and intensity of effort; by increasing diversity in the way business is approached and conducted, which allows rapid dissemination of best practices; and through the transfer of experience which allows reduction of risk. This can lead to improved offerings, better productivity and a higher innovation rate.

So let’s examine in slightly more detail the benefits of a hypothetical collaborative scenario for ISPs:


Partners can expand their scope by adding businesses/activities based on a partner’s -not their own- competence, market access and references.

Market Coverage

Obviously the partnership as a whole has broader coverage than the individual partner, which is important in itself. But there are also more subtle advantages, e.g.:

  • The partnership can play a role in projects or activities with customers who operate in different markets, but want to reduce numbers of suppliers -as the partnership can be considered as one supplier.
  • A partnership can have an advantage over an individual partner in accessing new markets, i.e. where no individual partner is active, either by sharing market entry costs or by making the partnership more attractive to potential customers in that market (experience from more markets, industries and knowhow) as well as implying greater solidity and dependability.

Client access

Collectively a partnership should be able to exploit individual partner customer access to improve overall access. In addition, it may be able to improve access to larger projects (scope or scale) by providing combined competences and a (virtual) combined balance sheet in the sense of consortium arrangements.

Bargaining power

A partnership not only has increased bargaining power with suppliers, customers and partners (e.g. OEMs), which is highly important for profitability. It also shapes supplier pricing strategies and intentions creating an enhanced effect. Furthermore, its positions carry more weight with partners (e.g. OEMs) and its influence is greater.


A significant number of overhead functions can be brought to partnership level and shared reducing unit overhead costs for partners, including sales and marketing, particularly as active online content-based marketing becomes more important in B2B contexts. In addition, utilization of resources of various types, including people, inventories, tools and equipment can be increased while the balancing of supply and demand for resources can be improved (opportunity cost of overutilization reduced).

Value creation

A partnership allows pooling of investment in innovation and competence building, which helps make both the individual partners (and the partnership as a whole) more competitive through improved offerings, enhanced productivity (processes) and reduced risk. In the case of ISPs, this is particularly important if/when there is a shift in the service mix which requires higher fixed cost investments to obtain recurring revenues (IoT, data, outcome based services) -in essence moving from a craft-like to a more industrialized form of operations.

So given the potential benefits of collaborative partnerships, why is it that they are not happening on a continuous basis? In the past partnerships (in the sense of this article) have been difficult because of distance and the prohibitive associated cost of communication without which the building of necessary trust and sufficiently deep understanding of each other’s strengths and weaknesses to envisage, coordinate and act on opportunities is impossible.  However, the fundamental reason is that up to the present technology shift and the induced changes in markets and business approaches, partnerships of this type did not have sufficiently compelling strategic justifications. The combination of improved tools, decline in collaboration and coordination costs and the need to improve chances of success in a disruptive competitive environment will probably make all forms of cooperation far more ubiquitous in the future.

Finally, implementing a successful collaborative partnership is not an easy task and requires some significant effort. The understanding and appreciation of potential benefits, but also the cost associated with achieving them need to be shared by participants. Some critical success factors are as follows:

  • Start with a small number of peers who have in common both the willingness to participate as well as the rationale for the need and justification, in particular a common view about how markets and competition will evolve. The number must be small enough to allow fairly rapid progress (without too many obstructions by widely diverging ideas), but also big enough that it can make a real difference in the ability to compete.
  • The partner companies should be of varying sizes and competences but no participant should be so big, as to be able to dominate proceedings and exercise power over the rest.
  • Create initial hypotheses on how the partnership could enhance competitiveness and support business objectives of the individual partners and set out a vision for the partnership as a whole.
  • Establish a joint team to validate hypotheses and set protocols for sharing of sensitive information.
  • Try out and select technology tools to enhance the collaboration process and increase the frequency, breadth and depth of interactions between team members.
  • Create an integrated collaboration platform to support strategic initiatives and actions.
  • Define strategic initiatives and prepare and endorse business cases around them.
  • Develop and agree governance, operating and value sharing models.
  • Identify key dependencies and risks and plans/actions to mitigate risks.
  • Regularly monitor and review progress and adjust plans as required.
  • Attract and integrate further partners as required.