Service Contracts and Remote Services have been playing an increasingly important role during the Covid Pandemic. In an SLN Virtual Experience Exchange on 29 June we explored lessons learned.

Before COVID most businesses saw service contracts as a way of deepening their relationship with their customer base and planning their own service operations.  Contracts were quite transactional in nature in that they were a pre-agreement to do ‘maintenance work’ through-out the year in return for uptime and favourable pricing on parts and upgrades.  Remote was not generally perceived by customers as a benefit, but more as a feature by which their maintenance suppliers could reduce service costs.

However, the COVID crisis brought a sharp re-evaluation of the role of service contracts and remote. For many companies that managed to maintain operations, remote became a key enabler for their equipment suppliers to support a good level of service.  Those equipment suppliers with service contract penetration in their installed base of greater than 25%, have generally faired adequately through the past 12 months. Many service operations have had a flat year or been down 10% on the previous 12 months. Not the disaster that many were predicting. And for those with a higher service contract penetration, many have even seen their service revenues grow.

These perspectives were very much in line at the recent (29 June) Service Leaders Network Experience Exchange where a group of service professionals shared their lessons learned in the area of Contracts & Remote from the past 12 months.

We first reviewed the results of a small survey that was conducted for the discussion and then had a series of conversations about what this meant for the businesses.

An interesting outcome of the discussion was not just the benefits of Contracts and Remote per se, but the greater emphasis on ‘Transformation’.  In our industry space, transformation and change are somewhat interchangeable words. Transformation should be inspirational and motivate a fundamental change in thinking or processes. And in this group of service leaders, we started to hear the need to transform the approach to Service Contracts in terms of the:

  1. Value proposition
  2. Business model
  3. Back-office service operations

Let’s explore a little of the discussion that was had:

Value Proposition

As described in the beginning of this article, traditionally service contracts have been perceived as being transactional in nature. They are an extension of service operations, delivered by organizations and processes that have not changed all that much. Now the tools are evolving beyond recognition but is the thinking?  Many would look towards the growth in the use of terms like servitization and digitization as proof that we are seeing a revolution in the making. Yes, the discussion is wider and more intense but many have not made fundamental changes to the way they work. What was refreshing in this conversation was service leaders emphasizing the importance of starting with the “customer view and then working towards solutions”. Consciously looking for “long term value for both ourselves and our customer”. The COVID crisis has brought into sharp relief the need for customers and suppliers to challenge their thinking about what a service contract looks like in terms of the on-site/off-site mix of activities. And expectations around the pro-activeness of suppliers in terms of alerts, prognostics, and corrective actions are being re-evaluated.

The expectation of this group of service leaders is that service propositions will become more sophisticated and strategic in nature.

Service Business Model

Not surprisingly as service contracts become more sophisticated the business models (how revenue and profit are generated) must also evolve. Here the discussion was particularly interesting due to the varied nature of the group. These were the key highlights from the Exchange:

  • Customers have become more open to evolving their view of the supplier/customer relationship and hence the sharing of risk and profit.
  • Service organizations that worked through third-party solution providers, whether they be channel partners or outsourcing partners have had to fundamentally question their business models during the crisis:
    • Shift to working through local/regional service providers (and the resulting loss of customer intimacy)
    • The need to develop hybrid centralized/decentralized models and to working with partners who have a particular service or technology expertise
    • A customer trend to insource service work to keep margins within own organizations
  • We heard from a defense industry customer, where often very complex and sophisticated contracts are delivered by a consortium of suppliers, how the management of risk and the level of involvement by the customer are becoming important areas of focus.
  • That COVID has offered an opportunity to extend new service contract models deeper into the installed base.
  • That organizations must not lose sight of the importance of spare parts to their business model. This is particularly challenging for those working through third parties where there is a loss of control. However, with more sophisticated value propositions which leverage the OEM’s knowledge through using digital technologies, there are ways to protect parts sales from substitution and to switch the customer perspective away from parts costs towards the overall value delivered by a contract.

Back-Office Service Operations
Obviously, if the thinking around value and profit generation fundamentally changes, so must the way service operations deliver on the promise.  It is here that digital technologies in terms of Connectivity, Augmented Reality, and Data Analytics are becoming a game-changer in how service organizations should deploy their resources.

The digitization of service processes through the latest generation of service management systems is leading managers to challenge:

  • The mix between field and central support
  • Geographical footprint
  • Skill sets: Greater emphasis on customer communication skills (in addition to technical/network skills)
  • How to link service with sales opportunities

These last two points were specifically mentioned in relation to more sophisticated contracts where less time is spent on-site, and more on analysis of customer data. As one leader commented,

”the challenge with digital is to make it seem real!”

This drives the need for service organizations to communicate the real value they deliver if they do not want to see their margins eroded.

Another important outcome of the discussion was the growing recognition that now service is not just about fixing problems, but also about working with and supporting customers to be more effective. This has consequences for the skillsets within organizations and the creation of new roles such as “Service Account Management”. It should also encourage closeness in the relationship between sales & service. Leading organizations already facilitate this conversation whether it be lead generation, joint visits or fundamentally moving to one Customer Success organization.

Another aspect of the back-office processes that is being transformed is the importance attached to data mining and data analytics. More sophisticated contract solutions must deliver more value to customers, the key source of which is the know-how and intellectual property of the OEM.  Much of this is captured in the Service Management Systems or through IoT platforms. The ability to identify and act on data is now a required core competency of most organizations, yet most professionals’ capabilities are still relatively immature. Hence this will be an important investment focus in the next 2-3 years.

In summary, there was a recognition that COVID has helped accelerate the thinking of both customers and suppliers that there is a need to transform (not just develop) their relationship to evolve more resilient and value-driven win-win partnerships.

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