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Winning in industrial service: The hallmarks of a service champion

Some of the most successful industrial goods manufacturers are becoming world-class service providers—a strategy that can significantly increase revenues and profit.

Par Oliver Strähle, Pascal Roth and Christoph Herr

First published on août 07, 2015
min


Some of the most successful industrial goods manufacturers are becoming world-class service providers—a strategy that can significantly increase revenue and, to an even larger extent, profit. Surprisingly, it’s not the particular markets served or the structure of an organization that distinguish the best service providers; it’s the right service mindset and management approach. Our experience and research show service champions free themselves from traditional thinking and focus on a few critical capabilities, including talent management, service sales effectiveness and—despite the many improvements in recent years—supply chain excellence for parts. It’s well worth the effort. Service can be a highly profitable business in its own right for industrial goods companies, generating a better and faster return on investment than large-scale R&D programs, new production facilities or acquisitions. For many firms, investing in service is the only way to sustainably grow their profits in the current economic environment. It’s also a strategic ace. Outstanding service can elevate a company above competitors in an increasingly challenging technical environment, where differentiation based on products alone can be costly and difficult to achieve. And it enables the top performers to create growth opportunities even in a flat market. Further, service builds a two-way bridge with customers, increasing communication and intimacy— and the ability to improve new products. Bain’s most recent Service Benchmarking Study highlights exactly how attractive service returns are across different industrial clusters—and how to achieve them. Our research points to six key attributes that set top performers apart and measures the impact of actions encompassed under those attributes. The study, which canvassed 45 leading European manufacturers with global service operations, includes a comprehensive service-benchmarking database with more than 120 key performance indicators for service businesses. Across a broad cross section of industrial companies, service contributed 22% of total revenues and had an average gross margin of 39%—significantly higher than margins on most manufactured products, according to the study. On average, the service business of these companies grew by 9% annually between 2010 and 2013, nearly double new equipment sales. That’s a sharp increase from the 5% growth rate captured in Bain’s 2012 report, Service now! Time to wake up the sleeping giant, and the companies surveyed expect the trajectory to continue. By 2020, they said, service revenue is likely to nearly double. The reason is clear: In the recent downturn, industrial companies discovered that a well-managed service business can keep growth humming even when capital expenditure is low. Indeed, the Bain study findings reinforce the value of service as a growth engine for manufacturers.

Some of the most successful industrial goods manufacturers are becoming world-class service providers—a strategy that can significantly increase revenue and, to an even larger extent, profit. Surprisingly, it’s not the particular markets served or the structure of an organization that distinguish the best service providers; it’s the right service mindset and management approach. Our experience and research show service champions free themselves from traditional thinking and focus on a few critical capabilities, including talent management, service sales effectiveness and—despite the many improvements in recent years—supply chain excellence for parts.

It’s well worth the effort. Service can be a highly profitable business in its own right for industrial goods companies, generating a better and faster return on investment than large-scale R&D programs, new production facilities or acquisitions. For many firms, investing in service is the only way to sustainably grow their profits in the current economic environment. It’s also a strategic ace. Outstanding service can elevate a company above competitors in an increasingly challenging technical environment, where differentiation based on products alone can be costly and difficult to achieve. And it enables the top performers to create growth opportunities even in a flat market. Further, service builds a two-way bridge with customers, increasing communication and intimacy— and the ability to improve new products.

Bain’s most recent Service Benchmarking Study highlights exactly how attractive service returns are across different industrial clusters—and how to achieve them. Our research points to six key attributes that set top performers apart and measures the impact of actions encompassed under those attributes. The study, which canvassed 45 leading European manufacturers with global service operations, includes a comprehensive service-benchmarking database with more than 120 key performance indicators for service businesses.

Across a broad cross section of industrial companies, service contributed 22% of total revenues and had an average gross margin of 39%—significantly higher than margins on most manufactured products, according to the study. On average, the service business of these companies grew by 9% annually between 2010 and 2013, nearly double new equipment sales. That’s a sharp increase from the 5% growth rate captured in Bain’s 2012 report, Service now! Time to wake up the sleeping giant, and the companies surveyed expect the trajectory to continue. By 2020, they said, service revenue is likely to nearly double. The reason is clear: In the recent downturn, industrial companies discovered that a well-managed service business can keep growth humming even when capital expenditure is low. Indeed, the Bain study findings reinforce the value of service as a growth engine for manufacturers.