How to build a services division to boost profits

NEW YORK—Industrial product manufacturers can build and insulate new streams of profits by establishing a sound services business line, according to consultants Bain & Co.

The firm’s European research finds 20 per cent of all revenues are generated by services—but it estimates the potential total upside is 35 per cent.

Indeed, in certain industrial sectors where operational wear and tear is a major factor, Bain says this number can rise to more than 50 per cent.

What’s more, service investments can turbocharge profits over the long run. According to the report, the average industrial goods company reaches profit (EBITA) margins between five and 10 per cent of its core equipment business. By contrast, service business revenues see profit margins of 20 to 25 per cent.

“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 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 outlines this ladder approach for organizing and delivering high-value services:

• Instead of passively responding to customer requests—the default response of many companies—offer continuous service contracts and upgrades during the initial sale. Move from service-on-request to service-on-a-schedule.
• Help customers improve. Provide preventive maintenance, service bundles and service other manufacturers’ equipment.
• Take the risks and worries off the customers’ shoulders. At the highest level, service businesses relieve customers of many operational tasks and risks by taking over the management of operations or facilities.

You will encounter challenges such as unique and protected technologies, unfavorable cost-value ratios, independent service networks and customers defining service as their own core.

Follow one of three revenue-generating paths to help tackle those challenges:

Grow services along the product’s life-cycle
Increase service counts by servicing more customers more types of equipment or sell more services throughout the product’s life-cycle. Bundle maintenance contracts, retrofit packages and online assessment services.

Sector or regional growth
Concentrate services in sectors or regions. Develop unique knowledge and deepen relationships by repeatedly servicing equipment at a given site.

Capabilities-based growth
Leverage capabilities and expertise to consult, procide business process support or other advance services. Typical options for this include energy efficiency, health and safety, environment and operational risk management.

“Services champions know 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.”