The Management of Service Business E-Book

Christian M. Wegner

• Herausgeber: BoD - Books on Demand
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2024

Seitenzahl: 219

Beschreibung

By focusing on the management aspects of the service business for large systems and installations, this book aims at closing the gap in technical literature regarding this subject. It covers all relevant management aspects of this business, like strategy, planning, sales, competition, contracts, and operations. It further gives hints for setting up an international service business and explains the role of of technology and innovation. This second edition includes two new chapters. The fist introduces a new approach for expressing the value of service in monetary terms. The second presents a methodology for valuating a service business. The book addresses systems and installations companies and their service departments, providing them guidance on how to improve the capitalization on the service opportunities yielded by their own installations and to establish service as a strong business pillar generating solid revenues. It also provides valuable information for generic service companies with no own installations business. Target readers are as well customers who operate large systems and installations, to help them in finding the best possible service provider for their technical assets. For suppliers and customers, the book gives advice on how to establish a trustful customer-supplier relationship. Finally, the book addresses young people at the starting point of a manager career in the field of technical services.

Leseprobe

Contents

Personal Note

Preface

Chapter Overview

General Considerations

Service Types

Strategy and Tactics

Growth Strategy

Protection Strategy

Planning

Market Assessment

New Orders and Sales

Profit and Risk–Opportunity Management

Sales

Competition

Contracts

Contract Forms

Performance Indicators

Supplier’s Liability

Other Aspects

Customer Relationship

Operations

Contract Management

Organizational Efficiency

Operational Effectiveness

Continuous Improvement

Contract Development

Organization

Supplier Maturity

International Business

Technology and Innovation

The Value of Service

Business Valuation

Valuation of an integrated service supplier

Valuation of a generic service provider

Multiples

Closing Words

Glossary

Appendix

Incentive Scheme

Personal Note

After finishing my studies in electrical engineering, I dreamed of a technical career in the development of large electrical machines like big motors, generators and transformers. Yet, by chance my first professional engagement was in service. I started as a service engineer for industrial computers in a large electrical company. In the beginning, I was a little bit disappointed because, compared to engineering, I considered service a less attractive area of activity. During the first couple of years, I was filled with doubt whether I have made the right professional choice. The confirmation that this was the best choice I could ever have made came only slowly. Our computers were in charge of controlling complex industrial processes, such as in steel mills, coal mines, or power plants. Therefore, their reliable function was mission-critical for the business success of our customers, and each fault would have had severe consequences. Each time I was able to solve a problem, it made me proud, and seeing the relief of our customers once their operation was restored gave me a strong sense of purpose. Troubleshooting is a special capability which can be acquired especially in service. It requires a high degree of analytical thinking, creativity, and pragmatism. Finding a sporadic error in the source code of an operation system is difficult. Finding it during live operation and under the menace of possibly stopping a several hundred million Euro installation is even more challenging. I cannot think of any area of technical activity better suited for young people for learning to deal with pressure and to assume responsibility than service.

Later, after starting in managing a service business, I learned that service is a people’s business, and therefore, the human factor is of decisive relevance. In large service projects, like the integral service for the logistic systems of a major airport, a couple of hundred people may be engaged. Aligning them toward the common goal of ensuring the success of their customer is a demanding management task requiring empathy and strong social skills. More than in any other business, being successful in service means loving to work with people, trusting them, and giving them a strong sense of purpose.

Sharing business success with all the service people in my organization was the most rewarding aspect of my career. I owe them my genuine gratitude.

Christian M. Wegner

October, 2023

Preface

Technical service is a large business field. It ranges from selling spare parts to the integral asset management of large installations. Many people think: “Service is just service.” This assumption is wrong. Each type of service has its own rules and its specific success factors. Many people also think that service is a simple residue of the systems business and comes automatically. This assumption is also wrong. Developing service to a sustainable and profitable business of relevant size requires a strategic life-cycle orientation of the company. It also requires talented and dedicated service managers with a wide range of skills including technical, social, intercultural, and entrepreneurial ones. Only few systems and installations companies succeed in maximizing their capitalization on the service opportunities stemming from their products, systems, and installations. For these companies, recognizing the special strategic relevance of service and regarding it as an equally important business pillar as systems and installations is a key success factor. In markets in which customers predominantly outsource the technical services for their systems, successful installations companies generate up to 30% of their revenues through service.

Covering all aspects of such a large area of activity in one attempt would be confusing. Thus, any discussion about service must focus on one specific type of this business. Basic services, like, for example, spare parts supply and on-call support, are already well covered in technical literature. There is also a lot of information available about various technical aspects of service, such as condition monitoring, failure analysis and maintenance planning. On the other side, subject matter books and articles about the management of a business offering complex technical services for large installations (like the integral maintenance and technical operation) are hard to find. Therefore, this book focuses on various managing aspects related especially to this kind of business and primarily addresses managers of service. Even though written mainly from the perspective of an integrated service supplier of a systems and installations company, the book contains valuable information also for generic service companies and for customers who operate large technical installations and need to service them.

All terms marked in the following with an asterisk (*) are summarized and shortly explained in the Glossary at the end of this book.

Chapter Overview

In the General Considerations chapter, the book addresses the increasing relevance of the service business for systems and installations companies. Those companies succeeding in establishing service as an equally important business pillar in addition to their systems business and thus in capitalizing maximally on the service opportunities yielded by their installations will be more successful—both in terms of enhanced financial performance and customer retention.

The chapter explains the nature of the service business, talks about success factors, and introduces and explains a couple of subject-matter terms which are used in the following of this book. It explains why service requires a specific business culture and why in service, as a people’s business, committed and dedicated people are the most valuable business asset. It further introduces the main focus of this book—the service business for large systems and installations.

Service Types explains the difference between support services and strategic services and introduces the different service types in the context of a reference service portfolio of a mature systems and installations company. It further explains on which activities systems and installations companies should have their main focus and emphasizes the relevance of an integral service approach including also the modernization of systems.

Strategy and Tactics explains these two important business terms and shows how they should be used to manage the development of service business. It shows why it is imperative that the service strategy of a systems and installations company must cover both the growth as well as the protection aspects of its service business. It further explains the interdependence between the new systems and the service business and shows how these two areas must be aligned to maximize the global business success. The chapter also highlights the relevance of a consistent life-cycle approach of systems and installations companies.

The Planning chapter starts by breaking with a couple of erroneous paradigms which still prevail regarding the profitability expectations for service. It then explains how the service market works and how it must be assessed. It shows why the structure of the service market is different from the new systems one and why these two markets follow different rules and have a different development.

It then describes how, on the basis of a sound market assessment, new orders and sales should be planned. It further introduces a couple of business indicators used to monitor the development of the service business.

In its last part, the chapter explains why profit planning is closely linked to risk management and continuous improvement.

Sales presents the most relevant specific sales success factors for each kind of service. It explains why selling support services is very different from selling strategic services and shows why for the latter the engagement of the top management of service companies is essential for winning a large service contract. It explains why developing a smart individual tactical approach for each large service project is an important prerequisite and emphasizes the relevance of a proper internal alignment between the new systems and the services divisions of systems and installations companies. The chapter addresses some typical scenarios in the sales process of large service contracts and gives a couple of practical hints for overcoming difficult situations during contract negotiation.

The Competition chapter describes how and why the competitive landscape differs significantly between the new systems and the service business of systems and installations companies. It emphasizes the strong competitive position of their internal service division for acquiring the service for new installations. The chapter gives valuable hints with regard to how service suppliers can enhance their competitive position and retain their contracts. It also provides help for structuring service contracts and shows how smart pricing can increase the chances for winning such a contract.

Contracts starts with an overview of the different contract types used in the service for systems and installations. It then introduces the most important performance indicators and gives advice with regard to how these indicators can be used and combined to form a meaningful performance scheme. This chapter also focuses on the liability of suppliers in service contracts and shows how suppliers and customers can agree on fair and target-orientated terms to the benefit of both parties. It explains the different liability terms in detail and shows how these are handled in practice. In the end, the chapter addresses the strongly disputed issue between customers and suppliers regarding the handling of inflation in long-term contracts.

Customer Relationship shows why, more than in any other technical business, maintaining a good relationship with their customers is mission-critical for business success of service companies. It explains how a good customer relationship can be established at operational, site management, and top management level and why it is important that customer relationship management (CRM) must include all these three levels. It underlines the high importance of assessing the customer satisfaction on a regular basis and gives practical hints for carrying out such an assessment in large service projects.

The Operations chapter explains why in a successful service contract active contract management is indispensable. It presents the main objectives of contract management and introduces the three basic elements of service excellence: organizational efficiency, operational effectiveness, and continuous improvement. The chapter ends with showing why contract development is a mandatory task for ensuring the long-term sustainability of the service business.

Supplier Maturity presents a couple of criteria which customers can use for selecting the appropriate service provider and introduces the concept of a maturity sphere for service providers. It explains which prerequisites service providers must fulfill to become genuine life-cycle partners of their customers.

In the International Business chapter, the book focuses on the special challenges service providers are faced with in the process of setting up an international presence. Many large customers have international sites, and following these customers around the world requires special preparation. The chapter also introduces the management practices required for developing and controlling an international service business.

Technology and Innovation provides a guideline for introducing new technical developments in service projects and addresses a couple of pitfalls service providers may fall into in this regard. It emphasizes the importance of making sure that all technical and technological innovations in service projects must always rely on a solid financial justification.

The Value of Service chapter introduces a methodology for determining the value of good service along its three main goals: (1) ensuring the safe and reliable operation of the installation; (2) preserving the installation in good technical condition; (3) adapting the installation to changing operational and technical requirements. By using an example from the airport logistics, it demonstrates how this value can be translated into real financial terms. For customers, this information is of great importance in the selection process of the appropriate service provider. For service providers, it presents the essential arguments for avoiding a pure price-based debate (favored by the purchasing departments of customers) and for conducting contract negotiations in a value-based manner.

Because the three above-mentioned service goals are always the same in the installations business, this methodology maintains its validity across other industries.

In the Business Valuation chapter, the book provides a methodology for calculating the fair market value of a service company in the installations business by presenting two concrete examples. The first example addresses the valuation of an integrated service supplier as part of the total business of an installations company. The second one deals with the valuation of a stand-alone generic service provider. The chapter also addresses in detail potential risks related to the acquisition of such a business. Thus, it is providing comprehensive information for making sound buying decisions.

General Considerations

Not long ago, most systems and installations companies* perceived service as an unpleasant duty and were happy not to hear anything from their customers again once their installations went into operation. Possibly, these companies were earning some low hanging fruits in the area of service by selling spare parts, hot-line, and on-call support. These basic services usually brought in good money and required little effort. Service was regarded as a secondary, low priority business, usually receiving little management attention.

Over the last three decades, more and more companies discovered the strategic and operational relevance of maintaining a sustained presence during the entire life cycle of their systems and installations. At the same time, a growing number of customers started asking themselves whether the maintenance of their technical assets had to be considered a core activity executed by own resources or rather be regarded as a non-core area which could be outsourced to external service supplies. As a result, new services such as Operation and Maintenance (O&M) and also new companies specialized on these services emerged. Most of today’s large systems and installations companies have set up own large service units offering their customers (the system owners or operators) a broad spectrum of technical services along the entire life cycle of their systems. In the following, service departments of systems and installations companies will be called integrated service suppliers*. Additionally, there are also many generic services providers* in the service market who are specialized only on service and do not have an own systems business. Most of them are usually smaller and locally acting companies of lower technological profile.

For systems and installations companies, staying engaged during the entire life cycle of their systems has many advantages. O&M contracts run over a longer period of time and are generating a continuous revenue stream. The on-site presence of own service personnel during the first years of operation makes the warranty process more efficient by ensuring a better service for the customer at less costs for the supplier. Suppliers can gain important information about the long-term behavior of their systems, which they can use to improve their new products. Furthermore, the need for system upgrading and modernization yields good opportunities for additional business. Quality service is also an important factor for high customer satisfaction and thus customer retention.

Servicing technical systems is something very different form manufacturing and installing them. Thus, to be successful, this business requires service specialists and service managers. Interestingly, vocational education still does not have service management in its focus. Just a few universities offer service courses. Because service has still little exposure when companies compete for new talents, young people generally perceive it as less challenging and less attractive in comparison with the product or installations business. This impression is false though. Especially for young people at the beginning of a management career, service offers an interesting combination of technical and people-related aspects. Primarily a people’s business, service opens unique opportunities for developing skills in the area of leadership and organization. As service takes place during the operational phase of systems, when these systems must produce customer value and when downtime means loss of production and profits, service is a business requiring decision making capabilities, responsibility, and entrepreneurial spirit.

Because it does not require significant investments, service is one of the businesses with the highest return on assets. The costs for the recruiting and training of service people are usually the only larger upfront expenditures. The main resource needed in service are people. Therefore, organizational efficiency is a decisive success factor in this business.

A specific risk factor of service is related to personnel. This risk can be relevant especially when large service contracts cannot be renewed, and thus service people possibly need to be terminated. Even though requiring certain attention, this residual personnel risk is often overrated. Well trained service people who are accustomed with a specific installation are extremely valuable. Most times in such a case, the new contractor or the customer would be happy to take over these people. In some countries, this is even mandatory according to the local labor law.

Thinking that ‘service is just service’ is the cause of many management mistakes. Service is a vast field with a large variety of different businesses following their own rules. Simply extrapolating experiences gathered in one area of service activity to another will not yield the expected results.

Generally, product and small systems service is a combination of on-call service, maintenance support, and spare parts supply. These technical services are quite straight forward and already well described in subject matter literature. Therefore, as a matter of completeness, they will be touched only briefly in the following.

An efficient spare parts supply is a mandatory prerequisite for all mature product, systems, and installations companies. Predictable delivery times and the availability of (also older) spare parts are the most important quality parameters in this kind of business. In this regard, predictable does not necessarily mean short. Making certain parts available may take some time, but if this duration is predictable, customers can well define their individual spare parts strategies in accordance with the procurement lead times and the criticality of their systems. Many suppliers have automated the order process by offering their customers on-line access to their digital spare parts internet portals. Spare parts contracts usually include contractual obligations, such as delivery times and the guaranteed availability of critical parts, which, if breached, may trigger penalties.

On-call service ensures the technical support of specialists of the supplier in the event of system failures. It usually comprises two or three escalation levels. Usually, the first level service is carried out by the customer’s own operational or maintenance people. This includes basic activities like inspections and simple troubleshooting. For more complex problems, the second service level is activated by calling the supplier’s hot-line. This service is usually provided by technicians of the supplier, often located in a service point in the greater area. High-end service activities, such a finding a sporadic failure in a complex system, are carried out by specialists of the supplier from a central service department. Sometimes, service levels two and three can be combined.

Maintenance support comprises the regular execution of certain maintenance tasks for which the customer’s service technicians do not have the required level of expertise and therefore the engagement of service specialists of the supplier is needed.

On-call service and maintenance support can be very efficient if the products and systems are capable of producing meaningful diagnostic data and allow that certain activities can be carried out on-line. The availability of such embedded technical features allows a much faster reaction in the case of failures and thus helps to significantly reduce their consequences. Additionally, saving travel time reduces costs and makes service more costeffective. With the support of remote diagnostics and maintenance, a few well trained technicians can efficiently service a large base of distributed systems. As critical systems require strict compliance with contractually agreed reaction and sometimes even restoration times, managers have to carefully determine the number of required technicians. Having not enough people may result in the non-fulfillment of contractual obligations, especially when more technical incidents require attendance at the same time. Employing too many people results in excessive costs. Correctly assessing the operational and contractual risks and finding the right balance regarding the use of resources are the big challenges in this type of business.

Managing a business related to the integral service for large systems and installations is a different matter. Unlike on-call service and spare parts supply, this kind of service is poorly covered by technical literature.

Large installations, like industrial plants, airport logistic systems, or power plants, are generally serviced by resident (onsite) service organizations*. If these services are outsourced, they are rendered either by integrated service suppliers or by generic service providers. As these service activities are closely linked to the system operation and take place inside the installations premises, service providers become integral part of their customers’ business. Thus, they have a decisive role in ensuring the overall business success of their clients.

The success of service for large installations depends on many aspects of different nature.

To generate profit, service must be efficient. Efficiency is defined as result divided by effort. In service, being efficient means producing the best possible technical result by using the least possible amount of (human) resources—in other words, highest possible effectiveness at lowest possible costs.

Service effectiveness means producing a good technical result, for example high equipment availability and reliability. It is not only determined by technical aspects, such as the right maintenance strategy, appropriate maintenance methods, and good service tools, but is also closely related to the skills level of service technicians.

Lowest possible effort and lowest possible costs are the result of an appropriate organizational set-up and of clear processes, including good work management and the smart distribution of people in the installation.

High service efficiency is closely linked to continuous improvement and requires the active engagement of all employees. Continuous improvement is the result of a collective effort, and thus an important aspect of business culture.

Implementing a positive business culture at project level is mission-critical for the success of resident services for large installations. People need to be motivated to constantly reflect about what they do and to think about what they can improve. Motivating higher skilled people, who usually also receive higher salaries, is already sometimes challenging. In this kind of projects, the majority of the workforce is made up by people with a lower level of professional education. Many of them are executing rather simple and recurring maintenance tasks and are receiving a comparatively moderate pay. Motivating these people is even more challenging and requires a sustained management effort. This is not only a question of adequate remuneration but also a matter of recognition and respect.

This business requires service managers with a high level of social competence. This skill is not only necessary with regard to the own people but is also very important in the direction of customers. Living together with the customer under the same roof is not always easy. It lies in the nature of this business that occasional disputes with the customer are unavoidable. In such situations, service managers should avoid an escalation and must find smart ways to calm down the situation. Social competence is not only required from the managers. It is also important that good cooperation is ensured at all operational levels down to shop floor. Service people must be sensitized to adopt a respectful attitude towards their peers on the customer side and to establish a trustful working relationship.

Resident service for large installations is a complex business with many facets, far beyond of just mastering technical challenges. Smart work management, organizational efficiency, people management, legal savvy, and social and intercultural intelligence are further decisive success factors in this business.

From the business perspective of an external service provider, the outsourcing maturity* of the respective industry is of major importance. The decision for the outsourcing of services is of strategic relevance and is usually made at the executive level of companies. In an outsourcing-friendly market, the majority of the customers prefer to engage external service partners for servicing their systems. In these markets, service suppliers have the opportunity for providing comprehensive services such as the integral O&M* of systems. A good example for such a market environment is airport logistics (baggage and cargo handling systems). In other industries, such as automotive, inhouse service departments prevail, and only few services are executed by external partners. In this case the service coverage of external suppliers is significantly lower.

Service Types

There are several different types of service which can be categorized into the following two main groups:

Strategic services, also called business oriented services

These services are of strategic relevance for the customer, and determining the way they are organized requires the engagement of the company’s top management in the decision making. For example, the CEO or COO of a company decide whether the integral service for a critical system is sourced out or is executed inhouse. Operation and Maintenance (O&M) and large modernization projects fall into this category.

Support services, also called operational services

These are services geared at supporting the in-house service organizations* of customers. Decisions regarding the execution of these services are usually made at the level of the customer’s maintenance manager. This category comprises planned maintenance, on-call service, spare parts supply, and smaller modernization projects.

For mature integrated service suppliers operating in an outsourcing-friendly market segment, a benchmark for the business split could be set as follows:

70% Operation and Maintenance (O&M): Comprises the integral maintenance and technical operation of large systems. This kind of service is rendered by resident (on-site) service organizations. Spare parts supply is usually integral part of such contracts.