Equipment services can ignite industrial sector profits as growth in China slows and Europe recession spreads

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EQUIPMENT SERVICES CAN IGNITE INDUSTRIAL SECTOR PROFITS AS GROWTH IN CHINA SLOWS AND EUROPE RECESSION SPREADS

New Bain & Company Report Finds Significant Profit Potential for Equipment and Broader Services, But Reveals Inability by Many OEMs in Seizing Full Opportunity

New York, NY—November 29, 2012—With economic growth in China slowing to nearly seven percent annually and Europe continuing to struggle under a debt crisis, major industrial products companies, cut earnings guidance recently as business conditions in many customer markets worsen. But according to a new report, entitled "Service Now! Time to wake up the sleeping giant," published today by Bain & Company, the global business consulting firm, industrial product manufacturers can build and insulate new streams of services profits, if implemented effectively.

Bain's research of European industrial goods manufacturers finds that roughly 20 percent of all revenues are generated by services but fall far short of what it sees as the potential total upside of 35 percent. In certain industrial sectors where equipment and its operational wear and tear—including aerospace engines, elevators and gas/steam engines—this number can rise to more than 50 percent. What's more, service investments can turbocharge profits over the long run. According to the report, the average industrial good company reaches profit (EBIT) margins between five and 10 percent in its core equipment business. By contrast, service business revenues see profit margins of 20 to 25 percent.

"Services are truly a sleeping giant amongst industrial goods manufacturers," said Oliver Straehle, Bain partner in Zurich and lead author of the report. "While product sales may slow in this choppy economic environment, equipment still needs to be maintained, especially in mission-critical industries as aerospace, elevators and transport vehicles."

Bain finds that while the services prize is substantial, few industrial good manufacturers have organized for success, highlighted by the fact that sales of spare parts still account for more than half of service revenues, suggesting that many customers turn to manufacturers only when they have no alternative. Few manufacturers exploit the full potential of services, such as inspection, and maintenance and repair of their own installed base. Within manufacturing companies, the service unit is often neglected, with poorly developed processes, haphazard performance indicators and a reactive sales force waiting for customers to call.

Bain offers a "service ladder" approach for organizing and delivering high-value services:

  • Step 1—Passively responding to customer requests, which is the default reactive response which is currently taken by many industrial companies. Bain recommends elevating actions to higher rungs of proactive value, namely:
  • Step 2—Actively offering continuous service contracts and upgrades. Moving from "service on request" to "service on schedule"
  • Step 3—Helping customers improve. Providing preventive maintenance, service bundles and servicing other manufacturers equipment
  • Step 4—Taking risks and worries off the customers' shoulders. At the highest level, manufacturers relieve customers of many operational tasks and risks by taking over the management of operations or facilities

Undoubtedly, manufacturers will encounter challenges, according to the report, and include: unique and protected technologies, unfavorable cost-value ratios, independent service networks and customers defining service as their own core.

Bain advises that industrial goods manufacturers can follow one of three revenue-generating paths:

  • Growing services along the product's life-cycle—the most promising avenue of growth for most manufacturers, which focuses their services on products they supply in two ways: increasing service counts—either by servicing more customers or working on similar equipment from other manufacturers—or by increasing intensity, i.e. selling more services throughout the product's life-cycle, including product bundling, maintenance contracts, retrofit packages and online assessment services
  • Sector or location growth—concentrating services in certain industry clusters, where manufacturers may have special understanding of customer processes, or where customers are physically based, where manufacturers develop unique knowledge and deepen relationships by repeatedly servicing equipment at a given site, which can sometimes go beyond owned equipment, even beyond own position by the industrial company in the process chain
  • Capabilities-based growth—Manufacturers can take advantage of their relative capabilities and expertise to provide consulting, business process support or other advance services to customers. These are typically capability areas that proven particularly promising, including: energy efficiency, health and safety, environment and operational risk management

"Services champions know to where to play and how to win," said Christoph Winterer, Bain partner in Shanghai. "They begin by taking an inventory of their installed base and define the most interesting customer opportunities. They develop a deep self-awareness of their capabilities and they make the right investments to develop the right services portfolio and overcome organizational inertia."

For a copy of Bain's "Service Now! Time to wake up the sleeping giant" report or to schedule an interview with Oliver Straehle or Christoph Winterer, German-language media, please contact Pierre Deraed at pierre.deraed@bain.com or +49 89-5123-1330, or Julia Henry at julia.henry@bain.com or +49 89 5123 1428; English-language media please contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102.

About Bain & Company, Inc.

Bain & Company is the management consulting firm that the world's business leaders come to when they want results. Bain advises clients on strategy, operations, technology, organization, private equity and mergers and acquisition, developing practical insights that clients act on and transferring skills that make change stick. The firm aligns its incentives with clients by linking its fees to their results. Bain clients have outperformed the stock market 4 to 1. Founded in 1973, Bain has 53 offices in 34 countries, and its deep expertise and client roster cross every industry and economic sector. For more information visit: www.bain.com. Follow us on Twitter @BainAlerts.