For companies caught up in the excitement and stress of making and selling a new product, it’s probably a stretch to think ahead to that time in the future when their innovation will be a commodity. However, in most instances, that time will come.
So what can a company do to grow its revenues and margins as the product moves from hot new item to one of many look-alikes on the shelf? Turn the services that keep the product functioning into a growth engine.
Many companies regard servicing the product as little more than a distraction. From that perspective, service is only a cost, and the best contribution it can make to the bottom line is to go away, or at least shrink. We are convinced that quite the contrary is true-that service can add substantially to shareholder value. In fact, over time, service may actually contribute more to earnings than sales of the product do.
Turning service into a growing profit center requires a shift in focus. Everything a company provides after the sale-spare parts replacement, professional services, help desks, warehousing, product recalls, field technicians and the rest-needs to be managed as an integrated whole.
Indeed, research has found that a company that institutes a first-rate service management capability can increase its service revenues by between 10 percent and 20 percent. Moreover, by making its service functions more efficient, a company can reduce operating expenses by 15 percent to 30 percent.
Finally, the knowledge gained by the service organization, which is in constant contact with the company’s customers, can be fed back into the manufacturing organization to help it make better products. Better products translate into a 10 percent to 20 percent reduction in warranty expenses. In addition, because there will be fewer faulty products sold, the company will not need to field-test as much equipment, which can help reduce capital expenditures by anywhere from 10 percent to 25 percent.
Many manufacturing companies have benefited already by rigorously and thoughtfully developing their service potential. At General Motors Corporation (GM), for example, post-sale parts and services account for a small portion of revenues, but they provide superior profit margins.
Four stages of development. An Accenture study of the auto industry a few years ago revealed that sales of $9 billion in parts and services contributed $2 billion in profits at GM. By comparison, car sales of $150 billion produced earnings of just $1 billion for the company. In contrast, electronics and high-tech companies have been, by and large, somewhat slower in reaping the rewards of service management. That is largely because historically, they have concentrated on creating innovative products rather than on providing service.
So how do companies transform themselves to take advantage of the bottom-line enhancing potential of service offerings? A manufacturer must evolve into a company that sells not simply products, or even products plus various services. It must sell solutions. To reach that goal, a company typically will pass through four stages of development.
?? Stage I: Products. The organization focuses solely on product development, engineering, manufacturing, and sales and marketing.
· Stage II: Products plus. The organization offers some support services, but they are focused primarily on basic “break-fix” maintenance.
?? Stage III: Services. The organization moves to provide a larger portfolio of service offerings. In most cases, a separate service organization is created with a separate profit-and-loss statement, and the product and service organizations operate independently of each other.
?? Stage IV: Solutions. In this stage, product and service capabilities are tightly integrated. The organization works to develop and sell a package of products and services to meet customer needs. Generally, as the product becomes a commodity, its gross margins slide from between 60 percent and 70 percent to about 20 percent. Gross margins for services typically range from 20 percent for simple break-fix services to 45 percent for higher-value-added services like technology enhancement or professional support.