New Business Models in Service Management
Often, a customer's first contact with the service organization is through a technical support website or call center. Within this venue, companies must (at a minimum) be able to respond quickly and completely. During subsequent service contacts - e.g., on-site installation, repair, and maintenance - company representatives actually become ambassadors whose skills and decorum may determine if the current customer becomes a repeat customer.
Replacement parts are another part of the service paradigm. If they are incomplete, ineffective, or unavailable, the relationship suffers. Same with the service kits, accessories, or product enhancements that a customer might order as extensions of the product itself. Finally, every contact point in the company must share the same information about customers, products, product ownership, and tactics/strategies for problem-resolution.
Today, every company must work to proactively anticipate and prepare for problems before they occur. Even before a product reaches the market, service-savvy companies design products with service in mind. Terms such as "design for serviceability" or "manufacture for serviceability" have invaded the lexicon of R&D and manufacturing departments. And in customer-facing functions such as sales and marketing, everyone is paying more attention to customer needs throughout the product life cycle.
Basically, companies for which high-quality, comprehensive service is the norm often think of service as an actual supply chain process. Clearly, supply chains that proactively support service management and customer support are a great deal more complex than traditional product supply chains. In addition to baseline processes associated with buy-make-move-sell functionality, they must incorporate capabilities such as repair depots; inventory deployment; routing and scheduling for field service; reverse flow logistics of repaired or damaged parts; and re-manufacturing of repaired or damaged parts. Service supply chains also must support many generations of parts with a wide range of demand volumes and characteristics. The challenge, of course, is deploying resources in the most cost-efficient way. However, as shown in Figure 1, there usually is a point of diminishing returns (the Efficient Frontier) that is difficult to extend.=
Figure 1 - Cost/service tradeoff curve
Meeting service requirements at minimum cost - extending the Efficient Frontier - requires companies to develop an integrated service management and customer support capability that includes:
- Design and manufacturing for serviceability - ensuring that customer service considerations are built into products from the start, and are interwoven throughout all business operations.
- Superior materials management and fulfillment - getting the right part to the right place at the right time and at the right cost.
- Superior information management - capturing and using timely data about customer needs, and making diagnostic and repair information available on demand.
- A robust customer interaction center - providing consumers with a single point of contact and problem resolution - available 24x7 - that can be reached through multiple modes of communication.
- Knowledgeable and responsible technicians - ensuring that consumers can have in-home repairs and maintenance completed in a convenient, timely, courteous and effective manner.
The Value of Service Management and Customer Support
Exceptional service management and customer support capabilities create value in ways that weren't always recognized or appreciated. Two key reasons for this realization are tighter sales margins and burgeoning levels of commoditization. The result in both cases is that service acquires new potential to differentiate one company from another and, potentially, to become a bigger contributor to revenue and profits than the products themselves. In addition, after-sales service repeatedly has been shown to have as significant an impact on consumer loyalty as the performance of the products themselves. Following are four areas in which service has become an increasingly significant business driver.
First, a study appearing in Harvard Business Review (October 1999) demonstrated the revenue-development potential of service. The study looked at three industries - personal computers, locomotives, and automotive - and illustrated how service-related revenues can exceed product-related revenues by as much as 20 times (Figure 2).
Figure 2 - Service as a driver of revenue
This model actually is similar to long-standing business approaches that recognize the necessity of pull-through business. Consumer goods companies, for example, have the "razor blade model," which observes that the initial product sale (a razor) is a one-time event, while the ongoing sale of supporting goods (the blades) are key to long-term success. In effect, profitability depends on the installed base of razors. Similarly, the amount that computer users spend on printer cartridges far outweighs the cost of the printer. However, the most telling example may be wireless communications: Many providers give away telephones and compete solely on service.
Another study appearing in the 1999 NADA Retail Report demonstrated the higher operating-margin contribution of post-sale activities. As shown in Figure 3, service related contributions to operating margins were typically three-to-four times higher than margins derived from initial product sales.
Figure 3 - Service as a driver of profitability in the automotive industry
A third analysis by J.D. Power and Associates demonstrates the loyalty-enhancement correlation, that is, the consumer's satisfaction with after-sales service and his likelihood of repurchasing the same make of automobile (Figure 4).
Figure 4 - Service as a driver of customer loyalty in the automotive industry
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Lastly, Accenture conducted an assessment of shareholder value creation at General Motors in May 2000. This study revealed that service parts are the biggest contributor to shareholder value. Out of $9 billion in revenue, service parts were shown to generate $2 billion in profits. Conversely, GM car sales contribute a relatively small relative profit on revenues of more than $150 billion (Figure 5).
Figure 5: Service as a driver of market capitalization in the automotive industry
New Routes to Cost-Effective Service Management and Customer Support
Given the levels of service that customers are demanding, and the complexity of providing that service, costs can be prohibitive for a single company with a traditional business model. For this reason, leading companies are aggressively seeking new ways to create an extended, service-inclusive value chain. The goal is to move the Efficient Frontier forward, to reach higher customer service levels without increasing costs (Figure 6).
Figure 6: Shifting the Cost/Service Curve to a New Frontier
Those "ways" fall loosely into three interrelated categories: e-commerce, alliances, and non-Internet technology.
E-Commerce
No service method is costlier than sending a technician into a customer's home. Conversely, the least costly method may be working over the Internet. Obviously, e-service alone is not a viable service strategy, but companies can benefit significantly by 1) building Internet-based service/support capabilities and 2) designing Internet-serviceability into new products. In fact, it is more and more common for consumers to access a company's website to address a multitude of issues, from simple information access to live interaction (and subsequent problem resolution) with a customer service representative. In the latter context, the Web can provide a venue for effective service, while enabling a back-flow of critical consumer information such as location, purchase history, contact information, and preferences. This information helps solve the problem and provides important data that can (and should) be used to assist in future product-design, manufacturing, and marketing decisions.
These advantages apply to B2C and B2B. However, e-enabled services also exist in just a B2B context. For example, trade exchanges (e-marketplaces) are becoming important venues for service management. Business-to-business e-commerce models also exist that focus principally on the efficient exchange of service parts or MRO items. Boeing Commercial Airplanes has an Internet-based parts-ordering and tracking website that allows constituents to order and track parts online and maintain inventory information. Via the site, customers can get the information they need about a component, including part-number changes, item availability and where the part is located, as well as the information needed for order placement, shipping method, and the time and location of delivery.
Alliances
For some time, leading companies have recognized the benefits of concentrating on core competencies and outsourcing non-core activities to third-party providers. But now, leading companies also are applying these concepts to service capabilities, and new enterprises are emerging to provide service-related assistance on a third-party basis.
One of the most publicized examples of service-related alliances is the Service Parts Logistics group of United Parcel Service, which assists companies seeking to outsource their service parts and repair networks. Another major player is SupportCity.com, which provides after-sales technical support over the Internet. Another business, TechForce Corporation, acts as a subcontractor to retailers that offer extended warranties on personal computers for service in the home. With all these entities, the value proposition is higher levels of service competency and new opportunities for collaboration-based, full-life-cycle service.
Non-Internet Technology
The first example here is actually "semi-Internet." Mobile commerce (or "m-commerce") refers to the delivery of e-information using wireless technology. This capability makes it possible for field service technicians with personal digital assistants (PDAs) to leverage robust diagnostic information to optimize a customer's service experience. However, PDAs provide more value than just a receiver of diagnostic or repair information. They also make it possible to conduct transactions (e.g., enabling a technician to sell a product or service contract on the spot) and to gather real-time consumer intelligence that can be directed back into product design, manufacturing, and marketing.
Technology's most significant service advance may be the extent to which it actually can replace service technicians themselves. For example, embedded intelligence in home appliances also expands the service reach of leading companies. Smart appliances from Whirlpool and other appliance companies are being equipped with the ability to self-diagnose problems, share diagnostic and repair information with consumers, and communicate status information and problems directly to their manufacturers' customer interaction centers.
Yet even with all this smart technology, service organizations still must have the capability to get skilled field service technicians to the right place at the right time with the right parts in a cost-effective manner. Toward this end, new forms of field service software address the specialized needs of service parts specialists and field technicians. These applications tailor the best advanced-planning algorithms to a service environment. Companies such as i2, Antenna, Logility, Xelus, Servigistics, VuryaNet, ServicePower, Metrix, Great Plains, iMedeon, and Foresight are developing such applications. Leading service delivery companies are teaming with them to implement their solutions.
Making It Happen
Of course, building successful new service capabilities requires the formation of a service strategy that complements the company's business and operating strategies. Following that, service leaders will integrate new tools and service methods with current core competencies to form a new service business model. More and more, that model will be based on "integration excellence" - the ability to choose partners whose core capabilities address your unique service strategy and whose enabling technologies mesh well with your internal systems. Integration excellence is the capability that allows the extended enterprise to present a single face to customers.
