Aspects of Service Transformation

A framework based on research and experience from big strategy and tech consultancies

Although many OEMs feel the urge to transform from a product-based to a service-based approach, many have just begun with the first proof of concepts and small pilots. Others have made first efforts in the past but failed. This bears the potential for many companies to make their service transformation efforts right from the beginning. Based on experiences and research from strategy and tech consultancies, this article provides a framework to guide OEMs towards successful Service Transformation.

Figure 1: Service Transformation Framework

The potential of aftermarket Services for equipment manufacturer

Many equipment manufacturers learned in the past, that selling a product without considering service provision to the customer leads to low or no growth. Profit margins are decreasing, brand loyalty is limited, pricing competition is fierce, and with the ongoing pandemic product demand has declined and orders are shrinking.

Customers’ expectations have changed. The mind shift from buying and owning a product towards valuing outcomes and services. Customers want to get the product while paying for the value of the services they receive. They expect their increasing requirements for speed and personalization to be addressed more flexibly.⁶

Aftermarket services and service transformation bears a huge potential for OEMs to generate new, consistent revenue streams, increased profit margins, deep client relationships throughout the entire product life cycle, and a “win-win” outcome for both — customer and company. Research from several big strategy and tech consultancies has shown that:

• Unlocking revenue. OEMs can double their service revenue within 3–5 years, without the need for large investments in product development or cost reduction programs¹. Currently, 29% of industrial company’s revenue is generated from services⁷. For more details on the revenue split between new service revenue and core service revenue, see the Accenture Study “Blueprint for Service Success — Your How-To Guide on Service Transformation”.
• Higher margins. Service margins (EBIT) can be up to 3–7 times higher than that of original equipment¹¹ e.g., aftermarket parts and services deliver over 50% of a manufacturer’s profit with an upward trend in light of COVID-1⁹¹⁰.
• Predictable Income. Income streams are predictable and sustainable as service income is less cyclical¹,¹⁰.
• Customer insights. Customer insights enable OEMs to support customers in a personalized and effective way¹⁰. A view of the customer throughout the whole life cycle allows OEMs to think about new business models, targeted offerings, and improved service levels and in this way higher NPS score up to 14 %¹¹.
• Product insights. Product insights empower OEMs to gain better visibility into how customers use their products and how products perform, which services as the basis for product refinement and new business models¹.
• Customer Relationship. In light of the COVID-19 crisis, service offerings allow OEMs to stay connected with their customers, enable continuous remote support and keep equipment running remotely. This ensures business continuity and relationship-building. For more improvement areas of aftermarket services in the light of COVID-19 see the Deloitte study “Aftermarket services Transforming manufacturing in the wake of the COVID-19 pandemic”.

This article aims at carrying out results analysis from a different point of view published by big strategy and tech consultancies (Accenture, BCG, Deloitte, IBM, McKinsey & Company) on the topic of Aftermarket Services for OEMs. This summary should put light on the different perspectives the topic of service transformation can take, highlight different research results and provide a comprehensive overview of what considerations OEMs should make on their pursuit to transforming a product company towards a service company.

The role of exponential technologies in service transformation

Technologies and digital bear huge potential for advanced service offerings for OEMs:

• IoT enabled through cheap sensors and wireless communication provides huge amounts of data providing insights that can reduce mean time to repair, cutting costs by up to 7%¹.
• Cloud enables easy, cheap, and scalable data storage and computing power to analyze big data lakes.
• Advanced analytics allows organizations to generate new revenue through commercial optimization and e.g., improve customer attach rate by up to 15 %¹.
• AI enables companies to predict maintenance needs before a problem occurs and this way cut costs up to 20 %¹.
• Mobile and AR devices empower service technicians to conduct services remotely and solve complex problems and can contribute to time savings up to 25 %¹.
• VR and machine learning help the team to transfer knowledge effectively and helps organizations to improve productivity up to 40%¹.
• 3D printing allows effective spare part management as needed, eliminating the need for inventory and stock cost.
• Online Platforms, different channels, and sales tools enable organizations to communicate easily with their clients and building trusted relationships.

A McKinsey and company analysis “has identified a pool of approximately $40 billion to $110 billion in revenue growth and $40 billion to $60 billion in margin expansion that could be captured through tech enablement in industrial services globally. This value comes from four main sources:

• a 1 to 3 percent revenue uplift from cross-selling, upselling, and new business models
• a 3 to 10 percent increase in service revenue from smarter pricing of aftermarket parts and services
• a 20 to 30 percent reduction in field-service personnel costs from optimizing demand and labor management.”³

For more details see the McKinsey & Company Study “How disruptive technologies are opening up innovative opportunities in services”.

It is a huge potential value shift that many companies have been considering. OEMs have started working on their service structure.

Why companies are failing to use digital for their expansion of new services.

A study conducted by BCG in May 2020 shows, that using digital for creating new services was harder than expected for many companies. Initially (2016 Benchmark), companies put their efforts on predictive maintenance, remote monitoring, and diagnostics. But the lack of connectivity between companies and their installed base made it impossible to offer services. Without a large pool of connected devices, not enough data is created to forecast maintenance needs. Even if companies work towards connecting their base, smooth integration and seamless communication across the value chain are still not given. This leads to restricted data access. Even if companies have managed to collect proprietary data, they are lacking the ability to derive insights from it¹⁰. In addition, companies lacked digital platforms and systems that build applications in a scalable way. This led to an unclear understanding of the value that customers would derive from the service. New offerings were not communicated adequately, and companies could not create the needed trust to make clients commit to sharing their sensitive data⁸.

Another study conducted by Accenture reveals, that 57% of the respondents lack strong service capabilities. The insufficient investment focus is another pitfall. Even if investments are made, processes are not streamlined. Only through a robust IT foundation, they can successfully grow the business. Also, inadequate service management practices are a reason for unsuccessful service transformation topics. The lack of short- and long-term key performance indicators leads to the fact, that companies have never adapted to the service business.

Many companies have only started their service transformation journey with the first proof of concepts and smart equipment pilots. This bears the potential for many companies to make the service transformation efforts right from the beginning.

Organizational Layers for successful Service Transformation

Based on the different research and experience from big strategy and tech consultancies, the following framework (see Figure 2) is a means to try providing a comprehensive idea of which considerations a company needs to make when trying to transform their services.

Figure 2: Service Transformation Framework Organizational Layers

Set service strategy, governance and cross-business alignment

Successful Service Transformation requires a clearly defined vision, a comprehensive strategy, and strong management and leadership support for execution. In order to make that change happen organizations should align towards a new strategic direction. E.g., companies might need to reorganize business units and establish an independent service unit, re-skill people, rethink their talent strategy, etc. To ensure proper adoption change management practices can support.

• Drive a unifying vision. Companies need to have a clear service strategy in place covering customers, employees, and partners that enable cross-business and operational alignment (vision, strategy, objectives, and goals). Service ambitions need to be clearly determined. Decisions on customer segmentation, service offering, business model backed by data analytics.¹¹
• Define clear service offerings and value proposition. Service offerings should be simple and clearly defined and aligned with all business units (e.g. marketing and sales). Each part of the organization should understand what value the service does provide to the customer and how the customer journey will look like. In an aligned and clear way, the organization may overcome customer reluctance and service enough details to the customer to communicate how this offering may help them.⁷,⁸,¹
• Plan for sustainable systematic digital service investment. Service transformation leaders take a strategic investment approach to develop profitable new services. They clearly define investment requirements for pilots and further development stages to finance innovation and take services to market. To continuously develop service offerings, companies need to drive efficiency through digitization to free budget for further investments into new service offerings.⁶
• Think long term. To help new services gain market traction, Service Transformation Leaders set long-term targets, measured through return on service investment. Companies should not focus purely on profitability, which risks killing initially low-performing offerings that promise significant benefits over the long term, like asset optimization.⁶
• Create standard metrics. Companies need to establish clear KPIs that support strategic goals for service transformation. These goals must be formulated for each unit of the organization separately: service, manufacturing, procurement, sales, supply chain, etc.¹¹,¹ . For successful operationalization, goals need to be tracked obsessively.
• Establish a coherent talent strategy. Service Transformation Leaders create dedicated talent strategies for employees. This includes tailoring service careers, skills, learning initiatives, goals, and interests, implementing a formal process to identify skills for service training, creating attractive career paths, inducing a flexible employment practice and culture. In order to create the right team companies should also consider attracting the right talent from outside. Talent must be trained and motivated to adopt a technology-centered paradigm. Another consideration might be to invest in start-ups and ventures to get access to new technologies and talent and partnering with educational institutions to recruit talent with the right skills.¹⁰,¹¹,¹,⁶
• Establish an own sales organization. Many companies do miss training their salespeople and set the right goals, which may lead to bad decisions (e.g., reliance on relationships instead of data). Recognize that service sales is different from product sales, and therefore create a separate sales force with own sales operating plans for each salesperson. Sales teams must be trained continuously, and performance managed strictly on ambitious targets. Service sales targets act as the main component to proactively push customer-specific sales initiatives.⁶ For a more in-depth analysis on how to sell in the aftermarket see the McKinsey & Company Study “Selling in the aftermarket: How to win the sales street fight”.
• Incorporate company-wide change management practices. Develop proactive change management since service transformation involves a significant change in the business, operations, and talent. Change Management might be crucial to facilitate the transformation to services as a growth platform, and not simply an add-on to the product business.

Transform your organization into a client-centric service organization

Companies need to have strong leadership and management to drive an agile solution-based mind-shift, focusing on innovation. The building, testing, and improving minimal viable products quickly is key for customer-centric innovation. Companies need to incorporate an agile cultural shift to success in their transformation journey.

Know your customer. A precondition to define a clear and simple value proposition and service offering is to know the client. In order to target the right clients, companies need to have in-depth knowledge of the customer segments and economics, specifically as they relate to the service.¹ Companies need to take advantage of different types of data to engage customers. The service unit should conduct research to understand customer expectations. Usage of Design Thinking methodologies and processes helps to transform the company towards a service design mindset based on customer-centricity.¹¹ The services journey must also be distinguished from the traditional product-focused customer journey.¹

Employ dedicated resources. In order to bring the customer experience to life, dedicated financial and human resources need to be freed and committed to this specific goal. To ensure consistency across all touch-points, strict execution of pilots with the highest quality standards needs to be guaranteed. Executed in a consistent way and communicated clearly, new services may create customer loyalty. Dedicated and passionate resources have the potential to redefine the role of face-to-face customer channels, creating trust and intimacy, helping to build long-term customer relationships.⁹,¹⁰,⁸ E.g., as the Accenture study shows, “more than 50% of [Service Transformation Leaders] use their field force to foster customer intimacy and identify cross- and up-selling opportunities. The sales force is also incentivized and trained to sell complex bundles as well as products and services.”⁶

Work towards a service mind-shift. In order to manage the cultural shift from a product-focused to a service-focused organization, companies need to incorporate new practices in the short term that lead to important mind shifts in the long term. Customer centricity is based on regular user feedback, which means consistently developing proof of concepts, testing them with a divers user audience, and adjusting were needed to test again. Quick development cycles, diverse teams, and the right mindset to continuously innovate are crucial for market disruption.¹⁰,⁸

Collaborate across the ecosystem — enhance service delivery by cooperating with partners

Service transformation leaders create ecosystem relationships and search for new partners to offer fresh ideas and capabilities, enabling consistent service innovation. In addition, they ring-fence key areas for knowledge and data-sharing to avoid clashes with IT and cloud providers.⁶ Partners can help to design and transform the customer experience and create additional value for customers.¹¹ Shared data may lead to better detection to correction processes, root cause analysis, early warning systems. Access to diagnostic data and standardized information may help to provide high-quality service, which the OEM would not be able to provide alone. As competition in the aftermarket service is fierce, companies need to have a good overview of the competition and collaborate to protect and grow the business. Often, the biggest rival is the customer itself, who may be doing maintenance and repairs themselves.¹⁰ For successful implementation, Service Transformation Leaders establish standard on-boarding processes and put the effort into finding the right combination of partners.⁶

Leverage platform capabilities

In order to create a service-focused approach, everything should be about “digital-first”. Companies need to move to strategic platforms that enable agile business, operational, and IT practices. All service functions should be overplayed with digital: marketing, sales, and service. OEMs need to establish cross-business intelligent workflows that link processes, people, and insights.¹¹ It is a strategic decision that needs to be done on the company-wide level and aims at avoiding building generic platforms.⁸

• Create a consistent omnichannel experience: Providing service to customers across a variety of channels and providing the necessary support are critical for customer acquisition and retention.¹¹ Customer Experience across different touchpoints must be consistent. Different channels may not compete against each other but complement themselves. To reach the customer where he is, companies need to understand which the preferred channel is.⁹
• Leverage Automation / AR / VR to boost efficiencies: “Organizations can resolve less complex service issues remotely by using automation, thereby reducing the volume of rudimentary tasks flowing to the field force. For more complex jobs, field technicians can apply detailed instructions from advanced-troubleshooting technologies — such as digital tools, augmented reality, or virtual reality — to complete maintenance or repairs faster and with greater accuracy.”¹
• Equip your workforce with productivity tools. Productivity Tools may include lead generation, sales & demand forecasting, process flow automation, self-service, service job scheduling, safety and health monitoring, field service automation. Companies may also set themselves apart by tracking and updating service delivery knowledge and toolkit to improve field force effectiveness and efficiency.⁶,¹¹

Create the IT landscape it takes to leverage exponential technologies effectively

In order to be able to leverage exponential technologies, companies need to establish a comprehensive enterprise architecture that is aligned with business processes, open, scalable, guaranteeing a seamless data flow. Open Hybrid Cloud infrastructure allows companies to use cheap and scalable computing power and data storage while ensuring the highest security standards and data regulation laws. Once this basis is provided, companies should focus on:

• Leverage data. Data management systems have been ranked as most relevant to an organization’s business. Data storage and sharing in an efficient and scalable way centrally governed provide a single point of truth.⁶ Combine service data with operational data to generate insights, improve efficiency and experience. And connect data horizontally (transparency between commerce, marketing, sales, service, field service, legal, and pricing) as well as vertically (customer life-cycle and engagement, asset and asset performance, and resource management).¹¹ (See IBM for more insights.)
• Leverage advanced analytics. Being able to analyze data effectively is the basis for making the right decisions from the beginning. Advanced Analytics should be used to quantify customers’ propensity to buy services and segment customers accordingly. For more information on the relevance of customer segmentation, see the McKinsey & Company Study “Aftermarket Services: The near-term growth opportunity in targeting the right customers”. It helps also to assess and prioritize repair issues in real time, conduct advanced troubleshooting, and even predict issues before they occur. Companies can apply such innovations to reduce costs related to service personnel — including the field force and staff in remote resolution centers and call centers. Repair analytics also allows companies to generate additional revenues in a variety of ways, including creating new offerings and improving the service levels of existing offerings.¹
• Create AI-enabled service capabilities. An IBM study has shown that Industry Leaders leverage AI-enabled service capabilities to provide premium services.¹¹
• Ensure connectivity into the installed base. It is still the most important driver for the provision of new services. In order to connect the installed base, the usage of sensors for smart equipment to measure basic parameters I key. This also includes retrofit kits that enable legacy devices to be connected.⁶

Building Blocks for the Service Transformation Journey

Once organizations have led the organizational foundations, they can start their service transformation journey. The building blocks showed in Figure 3 are a suggestion based on the research from different strategy and tech consultancies on where to start and how to proceed in the transformation journey. In the first steps, companies should focus on digitization of their existing service to drive efficiencies which free funds for creating new services. With raising service transformation maturity.

Figure 3: Service Transformation Framework Building Blocks

Start at digitizing existing core service. Digitization bears a huge potential for efficiencies and cost reductions of existing services. For example, the installation of basic sensors in equipment to collect basic performance metrics enables OEMs to provide remote monitoring and operations services. Efficiencies can be generated by equipping field service with mobile devices. Having all data in one place without the need of carrying heavy laptops or paper-based information does not only save time but changes the role of the service technician. Additionally, equipped with AR and VR, mobile devices can generate further efficiencies when e.g., it supports the technician to solve complex tasks, increase spare part and device sales, and improves knowledge sharing in an aging field force. B/S/H Mobile Services, an IBM project, is a great example of how the digitization of the field service technician led to efficiencies (“One more job per day.”) and transformed the role of the technician. It a great example of how digitizing core services can disrupt the market. See the B/S/H case study here. Service Transformation Leaders also recognized that Service Standardization in terms of offerings and delivery process helps to make the offering comparison simple and lay the foundation for high-quality delivery. Providing digital customer interfaces for clients also helps to force brand loyalty and client relationships. In addition, companies should continue to digitize in order to free further resources for generating new services.

Use efficiencies generated from digitizing core services to create New Services. Once the installed base is connected to the cloud, the generated data can be used to not only identify malfunctions but predict and anticipate them. Using a monitoring system that continuously tracks the machine’s performance is the next step in anticipating when failures are likely to occur, schedule maintenance, and prepare for the appointment so that technician shaves all the equipment needed for the maintenance. Condition monitoring generates performance and quality improvement. A great example of this is KONE. KONE uses Watson IoT to predict elevator conditions and suggest resolutions for potential problems. See the KONE case study story here. As the IBM study suggests Predictive Maintenance generates 13 % growth per year.¹¹

Adopt new business models. Traditionally, OEM’s business model is based on a “cost-plus” approach, considering the frequency and severity of the services. While tech-enabled service and remote repair capabilities drive efficiencies, increase uptime while the visibility of field services decrease, companies need to rethink their business models for this improved service. “To capture revenues in this new environment, companies need connectivity-driven commercial models based on equipment performance or condition. Companies must also find innovative ways to monetize the trove of data they are collecting about customers and products.”¹ OEMs must work towards being seen as service providers instead of product suppliers.¹⁰ Connectivity-driven commercial models based on equipment and performance help to reflect the newly gained efficiencies. Companies may start to think about pay-per-use models that reflect customer’s needs. IBM predicts a 22% yearly growth rate for outcome-based business models. Pay-per-performance arrangements may gain a 16% annual growth rate.¹¹

The market for equipment manufacturers is dramatically changing. Profit margins are decreasing, pricing competition is fierce, customer expectations are changing and new technologies are disrupting the market. In order to stay competitive OEMs identified the need to provide tech-enabled services. Services bear the high potential to generate high-profit margins and new revenue streams with a high potential to disrupt the market. Although many OEMs feel the urge to transform for several years, many have just begun with the first proof of concepts and small pilots. Others have made first efforts in the past but failed. Companies have learned from the past and shifted their efforts towards enabler technologies. This bears the potential for many companies to make their service transformation efforts right from the beginning. Based on experiences and research from strategy and tech consultancies, this paper aimed at developing a framework for successful Service Transformation. The Framework is divided into two parts. It suggests organizational layers that need to be considered when transforming a company towards a service-oriented company. Once this foundation is laid, it ordered building blocks suggest how to start and how to continue the transformation.

Sources:

[1] McKinsey & Company: “The services solution for unlocking industry’s next growth opportunity”, Benjamin, G., Lavandier H., Muthiah S., (Jan, 2019)

[2] McKinsey & Company: “Industrial aftermarket services: Growing the core”, Ambadipudi D., Brotschi A., Forsgren M., Kervazo F., Lavandier H., Xing J. (Jul, 2017)

[3] McKinsey & Company: “How disruptive technologies are opening up innovative opportunities in services”, Ananthakrishnan B., Atluri V., Krishnamurthy H., Muthiah S., (Nov, 2015)

[4] McKinsey & Company: “Aftermarket Services: The near-term growth opportunity in targeting the right customers”, Benjamin G., Brink H., Kervazo F., Lavandier H., Rozenkopf I., (Jan, 2019)

[5] McKinsey &Company: “Selling in the aftermarket: How to win the sales street fight”, Clark S., Kervazo F., Lavandier H., Egleston E., Kelleher J., (Feb, 2019)

[6] Accenture: “Blueprint for Service Success — Your How-To Guide on Service Transformation”, Tilette M., Dimitrova-Micha J., Hofström U., Awhrendorff M., Weissenberger C., Marti O., (2020)

[7] BCG: “Changing the Game in Industrial Goods Through Digital Services”, Füllemann M., Salmerón F. (Mar, 2016)

[8] BCG: “Industrial Products Makers Chart a New Path to Digital”, Füllemann M., Dahle M., Salmerón F., Rossbach V., (May, 2020)

[9] Deloitte: “The digital transformation of customer services — Our point of view”, Hoong V., (2013)

[10] Deloitte: “Aftermarket services Transforming manufacturing in the wake of the COVID-19 pandemic”, Wellener P., Lineberger R., Millar K. (May, 2020)

[11] IBM: “Growing service business model — Industrial machinery superstars show the way”, Bracke H., Garg G., Lin S. (2021)

[12] IBM: “Services Transformation — A Smarter Enterprise Point of View”, (Jan, 2017)

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