Field services organizations are being squeezed by industry trends that are depressing product revenue, flattening services revenue, and requiring a transition to outcomes-based service offerings in order to stay ahead of the game.
Internet of Things technologies and a focus on digital transformation are two keys to that transition.
In its The State of Field Services 2018 report, the Technology Services Industry Association looked at the problems that its constituent companies face, problems that also apply to a broad range of companies that sell products-and-services packages. The report identified some approaches that can lead these businesses out of their dilemma.
On the problem side, capital expenditure models of the past are faltering as customers insist on their suppliers being more aligned with business outcomes, wanting their suppliers to have a stake in their success.
Service margins and revenue are declining, though not as quickly as product revenue, the TSIA says, and because of that, service revenue is now a higher percentage of company revenue and becoming more important as a result.
What service organizations need to do, TSIA says, is move beyond a product-attached service focus. In that model, as product sales fall, so will service revenue, since there aren’t as many products to attach services to. Also, some maintenance contracts are particularly subject to commoditization because of independent service providers’ moves.
The foreshocks of disruption
There are four signs that serve as foreshocks to the earthquake of a disrupted business model for service organizations:
- Changing service levels: More customers push for service level agreements based on outcomes, such as a focus on “resolution” time rather than “response” time, with penalty clauses for falling short.
- Operational expenditure shift: Customers push for access to the technology (OpEx) rather than owning the asset (CapEx) in a move to pay only for what they use.
- Commoditization: Product and service margins are under pressure, and revenue growth struggles to keep up with the growth in costs.
- Investor fears: Investors begin to see your market as a prime one for an as-a-service disruption and have doubts that your response is sufficient to that threat.
All these pressures highlight the ever-growing need to optimize service delivery and reduce its costs. And with the costs of labor and spare parts, which together account for more than two-thirds of total field service costs, it gets even more challenging: You can’t cut employees when your resolution time SLAs grow more demanding. Also, spare parts need to be more available than ever when time is so critical.
The answer is a combination of advanced methods of resource planning and the ability to drive revenue in line with the value that the services provide. The product-attached services focus typically involves a cost-plus pricing model designed to create a consistent margin. However, this pricing approach can’t keep up with the higher costs associated with delivering shorter resolution times. But a supplier can minimize price sensitivity by highlighting the “tangible business value” of the service.
Tangible business value is based on what the customer values, not what the supplier does, spotlighting benefits such as time savings, cost savings, improved employee productivity, improved customer satisfaction, and improved project completion ratios. The supplier can achieve success by determining the costs required to deliver that value and finding the sweet spot between the cost line and the value line.
Technology to the rescue?
TSIA emphasizes that smart, connected products and IoT can play a major role in reducing service delivery costs. On top of that, data collected can be used to inform new high-value-added service offers.
Most organizations start their IoT initiatives by concentrating on the product, aiming to improve product focus on reducing service delivery costs. But they can accomplish more by expanding the definition of a product. That entails a move along what TSIA calls the “Remote Services Continuum” from an emphasis on service efficiency to process optimization and then to customer outcomes.
By understanding that continuum and the data required to improve customer outcomes, product development teams can incorporate the right sensors, edge devices, and embedded diagnostics to begin building the data sets that will lead to future service offers.
Leveraging IoT allows service organizations to perform more maintenance and repair services remotely, rather than on-site. It enables the use of predictive diagnostics to reduce the need for on-site services, with some customers barely realizing their equipment has been serviced while they enjoy impressive uptime numbers.
IoT advances can help organizations streamline their processes and reduce costs while simultaneously improving service delivery capabilities. This makes it possible to move to a results-focused, outcome-centric service environment.
At the same time, digital transformations can aid in the transition. As TSIA points out, businesses can establish real value and build customer loyalty by reducing the time it takes to respond to competitive as-a-service market entrants and transitioning to developing offerings with the greatest impact on customer outcomes. .
As a result of this transition, service organizations will be able to watch their revenue evolve from an upfront CapEx sale to recurring revenue throughout the relationship. The majority of company revenue will come after the sale, and data collected from the installed base will become more valuable than the product itself.