How do manufacturing companies sell services?

It's not easy for a manufacturing company to profit from its services business. Let's look at the example of a large technology company that is a global leader in medical devices, information technology, automotive equipment and transportation systems. As early as 2003, the company's information technology division, which has sales of 5 billion euros, realized that its products were becoming increasingly homogeneous, with a net profit margin of only 3 to 4 percent. By contrast, the net profit margin on the product-related services it provided, such as installation and training, was double that. As a result, the division decided to invest heavily in developing its ability to serve large customers. Managers estimated that profit margins on such customized services would soon reach 15 percent. However, managers' estimates were far from the actual results, and in 2005 the division reported a net profit margin of just under -10 percent. The new services business suffered heavy losses, amounting to some €260 million for the entire Group in this year alone. The reasons for the large losses were mainly the following: first, the difficulties encountered by the back-office divisions in providing services greatly exceeded the company's expectations. This was due to the complexity of the service and the fact that each customer had highly customized service requirements - which meant that the company could hardly draw on the experience and knowledge it had gained from serving other customers. Secondly, salespeople who originally marketed products with basic service contracts were dealing with people in lower positions in the target company who had no decision-making power over solution contracts worth millions of euros. Thirdly, much of the knowledge about the services had to be acquired externally, which was time and resource intensive. The company's director in charge of the services business frankly admitted these problems: "We were in such a hurry that nothing was actually ready yet." As the example of this company above shows (which has since turned around its services business), many companies fail to successfully develop a services business because they try to make the transition in a very short period of time. Successful companies always take steps to accomplish the transformation. Moving slowly at first, they identify what simple services they are already offering and charge for those services, adding more complex services as they pique customer interest. Next, they standardize their service processes to make them as efficient as their manufacturing processes. As services become more complex, they ensure that the capabilities of the sales force keep pace with development requirements. Finally, management shifts its focus from the company's processes and structure to the nature of the customer's problem, the opportunities the customer process provides for the company to add new services, and the new capabilities the company has to provide those services. ● Recognize that you are already a service company To develop service capabilities, a company must first make managers and customers aware of the value of existing services. For large companies, they can figure out which services they currently offer can be profitable simply by comparing the billing practices adopted by their various operating divisions. A savvy company will assign an executive to look at the practices of each business area and identify undiscovered services. With initial results, the executive can begin to design a forward-looking service strategy. This early-stage designation of a person responsible for developing the service business ensures that the service initiative is not just the serendipitous brainchild of a single business unit, but becomes part of the overall strategy of the company, and that best practices in one business area can be generalized to the entire company. ● Industrialized manufacturers that implement back-office operations are accustomed to stable and controlled production processes. When they develop value-added services, they may find that customization brings them a nightmare of exorbitant costs. If they are not able to prevent this from happening, value-added services are hardly profitable. Heidelberg Printing Machines GmbH, a German manufacturer of printing equipment, suffered the back-office operational problems that can occur when a manufacturing company goes into the service business. Its French customers in the maintenance of printing equipment in two ways to choose from: one is pay-as-you-go, that is, whenever a service technician should be requested by the customer to provide on-site service, Heidelberg invoices the customer to collect the cost of spare parts and labor; the other is to enter into a full-service contract to provide customers with timely technical support, remote monitoring and preventive maintenance services. The problem the company encountered was that customers who chose the second type of service often sought help twice as often as the first type of customer. And, because the second type of customer doesn't have to worry about service costs, Heidelberg's service technicians are more diligent about replacing parts on their presses, visit them more often, and are more likely to be hasty in planning their visits, which can lead to an unnecessary increase in the number of visits. (Service technicians tend to believe that the full service fee charged by the company covers all costs.) All of this erodes the profitability of Heidelberg's full service contracts, making them less profitable than pay-as-you-go methods. Building a service-savvy sales force If a company is ready to move from providing simple product-related services to offering more complex customer solutions, managers must revisit their sales management strategy. Service sales cycles are longer, and the sales process tends to be more complex and strategic, which means that the client side often leaves decision-making to those in higher positions. Many companies have struggled because they have not recognized this challenge. For example, Heidelberg's original sales negotiators tended to be lower-level people such as purchasers or heads of in-house maintenance at the customer's company, with the former focusing on the cost of each part and each service, which the latter might see as a threat to their own jobs. Heidelberg needed to build a sales force that was adept at dealing with production managers at customer companies who could see the significance of the new services to the company's overall cost reductions. All of the successful manufacturing companies in our study have gone to great lengths to retrain their sales forces. While most of the companies that were successful in providing services made some distinction between product and service salespeople. However, problems still arise. A company can only give material incentives to its salespeople if they are motivated to sell their services to customers and not just focus on product sales. When product revenues are much higher than service revenues, it becomes more difficult for salespeople to change their focus. To minimize conflicts between service and product salespeople, Air Liquide created a double-points system: for each deal made, product and service salespeople would receive the same commission. Finally, to sell services to customers, companies need to develop tools that demonstrate the value these services create for the customer and make the customer aware of their value. ● Focus on Customer Processes Once manufacturing companies have learned to sell and deliver services in a cost-effective manner, they can begin to address customer problems and optimize their processes in a comprehensive way. This means shifting their focus from themselves to their customers, paying full attention to their processes, incentives, and organization. When manufacturing companies are no longer limited to providing ancillary services related to their products, but also offer some complex services to their customers, they need to revisit the basis for pricing and the way they measure success. Product-oriented companies focus on metrics that are generally based on input elements-such as hours of equipment use and sales volume. As long as the services they provide are relatively independent and similar to the product, and the risk of something going wrong is limited, there is no problem with focusing on these types of metrics. In this case, both the front and back office of the company see the service as a product, which means that input costs are the key focus. However, if the service is more complex, the company needs to focus on solving the problem from the customer's perspective. When a company commits to solving a problem for a customer, it takes on much more risk. Once company executives redefine the value proposition with a focus on solving customer problems, they may soon find themselves lacking the expertise needed to handle the processes involved. Offering services to customers can be an effective way for companies to lock in customers and improve their switching costs. As an executive at Air Liquide in France put it, "The deeper we get involved in a customer's business, the easier it is for the customer to forget how a lot of the work is done." At the same time, service is an excellent way for companies to gain business for new products. Fenwick executives told us, "Whenever we are not successful in selling products directly to our customers, we offer to service the competitor's products that they buy." Ultimately, the service relationship with the customer will give the manufacturing company access to future business. But all of these benefits can't be realized overnight; the 4 steps presented in this article will help accelerate the process and increase company profits. (Source: Fortune Today - Sales & Management; Recommended by Sujie Li) Making Employees Understand the Full Meaning of Their Jobs Issue 7, 2010 - The World's Biggest Moment