Following a Roadmap To Success in an Outcome-Based Service Model
This report is based on recommendations made in a webinar hosted by WBR Insights, and presented by Hitachi Solutions. The webinar focused on bridging gaps within service strategies in order to meet shifting customer expectations around outcome-based service models.
Setting the Stage
To give you a sense of what we do at Hitachi Solutions, we are part of a large company that is focused on the Microsoft platform. Our focus is as a solution expert, and as a consulting and system integration entity.
One of the things that we enjoy is the fact that we get recognition for the quality of our solution delivery, our customers’ satisfaction, as well as our global presence.
We bring together subject matter experts in this particular domain across multiple industries and verticals. This gives us an understanding from a pure field service perspective. Not only that, we also see how that topic broadens out and, ultimately, helps businesses as they transition to a more developed service model.
Our focus in this report is on the transformation roadmap towards integrating the progressive technology available today. The idea is to progress on a journey where you are building on base elements of field service. These include process improvement, business improvement within your organization from standardizing your data and your assets, your location, all the way through to understanding outcome-based models and the trends that are impacting the delivery of service on a macro level.
Incorporating things like predictive resolution, augmented reality, equipment optimization and self-healing concepts is what we’re seeing as one of the fundamental changes happening in the market today.
Contextualizing the Movement Towards Outcome-based Service Models
One of the trends that we’re seeing now is that traditional, manufacturing-oriented companies are seeing a shift that is being driven from customers and competitors towards outcome-based service. They’re seeing this as an opportunity to begin to differentiate, and as an evolution to a service-led business. This is going to change both the way they go to market, the way they compete, and the way they talk to their customers, their channel, their partners, and their ecosystem. The reason why they’re moving to this model is they are seeing growth opportunities and evolving customer needs.
A great example of a brand adopting an outcome-based model is Rolls-Royce, a jet engine manufacturer that sells engine availability to their customers.
They’re moving from selling an engine and responding to maintenance calls, to selling uptime for aircraft via the engine and then proactively handling service themselves.
We get an example of the same strategy with a building control manufacturer, Honeywell. Honeywell is now selling smart buildings. They understand and communicate that they are going to be taking care of all the equipment. What they are not going to guarantee you is that your building heat usage won’t exceed X. You’re not going to use this much more than X of electricity. Instead, they establish that they are going to work towards KPIs.
Case study: Rolls-Royce
Let’s talk about a real-life example that we can all understand. This is Rolls-Royce, the jet engine manufacturer, as opposed to the car makers and the heavy equipment machinery makers.
The traditional revenue model for Rolls-Royce was that they would sell a product, a jet engine. They would make money from that, and then some point down the line, they would make a bunch of money from parts, repair, and services. They would cover it under a warranty for two, three, four, five years, whatever the case may be and then that’s how their revenue curves would go.
One of the things that they noticed is that this revenue curve is something that all manufactures of their kind share. Over the course of time, they were starting to erode their market.
In response to this, Rolls-Royce created the Total Care program. This means instead of selling you the engine, the manufacturer is going to sell you uptime. They ensure that their equipment is always running at the right time, and service it as needed. This program started in about 2000. From 2000 to 2018, they went from a 14 percent market share of large engines to 35 percent market share. The large engines market has grown tremendously as well. They went from 10 percent of their engines being on the Total Care package to greater than 90 percent. What they’re saying now is that they are looking at exceeding a dollar or a pound per share of free cash flow just from this program.
The idea here is they’ve transformed from competing on price, competing on feature function, if you will, and now are moving into a service-based and outcome-based model and it’s pretty clear that they’re seeing some great benefits from this.
What kind of Field Service Organization are you?
“Our goal is to operate efficiently so we’re minimizing the cost of servicing the products we produce.”
The goal of cost-center service organizations is to minimize cost to serve, MTTR, first-time fix rates, and all those traditional service metrics that we all know.
They tend to care more about minimizing equipment downtime, increasing first-time fix rates, maximizing technician productivity, and so on.
The core challenges that these organizations tend to have typically center around a lack of visibility into asset performance, resource management, performance optimization, and low first-time fix rates, being more driven by service rates and cost-to-serve as well as unnecessary service calls. There’s a lot of duplication. There are a lot of error-prone processes.
The key conversations to have within a cost-center organization are around how often you do multiple visits, what to do when you make a visit for a particular problem then discover another, how much duplication of effort there is, and how much lack of visibility is impacting your organization.
- Director of Field Service
What do cost-center customers care about?
Reducing service costs by:
- Minimizing equipment downtime
- Increasing first-time fix rates
- Maximizing technician productivity
- Optimizing service scheduling
What challenges are cost-centers facing?
- Lack of visibility into asset performance makes it difficult to anticipate equipment failures.
- Limited diagnostic capabilities prevent technicians from identifying maintenance issues before arriving.
- Low first-time fix rates increase service costs by limiting technician productivity.
- Inability to coordinate technician, tool, and parts availability decreases service efficiency and performance.
- Unnecessary service calls create additional costs and waste resources.
- How often do our technicians require multiple visits to address service requests?
- How much does it cost every time we dispatch service technicians to a customer site?
- How do we usually learn that a piece of equipment is malfunctioning?
- How often do we check on equipment that is actually functioning properly?
- How often are technicians unable to fix an issue because they don’t have the right parts, equipment, or expertise?
“We see field service as an opportunity to differentiate from competitors and drive strong margins.”
A profit center tends to look at service from a standpoint of increasing margins, increasing upsells, increasing revenue, and searching for differentiation strategies.
This is the kind of organization that typically has the cost-center centric parts of its service organization figured out. It’s moving more into a profit center model for certain parts of its organization.
A profit center organization tends to have slightly different perspectives. Conversations focus on the strategic level. How are we competing? How are we differentiating? How come our customers are willing to go with us versus somebody else, and what’s bringing customers to us?
If you are at this level of servitization, this is the perfect time for you to think about doing things like AI, machine learning, and connected field service.
Profit Center Model
Profit center customers care about increasing margins.
- Vice President of Service, Sales, Product
What do profit center customers care about?
Providing differentiated service by:
- Proactively identifying issues
- Limiting equipment downtime
- Ensuring technicians are prepared
- Delivering a first-time fix
Driving strong margins by:
- Optimizing resource management
- Capitalizing on sales opportunities
- Eliminating unnecessary service calls
What challenges are profit centers facing?
- Inability to anticipate equipment failures increases asset downtime and frustrates customers.
- Unprepared technicians limit service efficiency and reduce customer satisfaction.
- Lack of access to customer information makes it difficult for technicians to account for customer preferences.
- Limited access to sales tools prevents technicians from capitalizing on upsell and cross-sell opportunities.
- Unnecessary service visits reduce technician productivity and decrease margins.
- What are the actions we’re taking to remain competitive as our products become commoditized?
- How are we differentiating?
- Which products and/or services are most profitable, and which are frustrating our customers the most?
- How often do our technicians require multiple visits to address maintenance issues?
- How do you make sure you have the right people, tools, and parts for each service visit?
“We’re moving to a service-based business model where we deliver outcomes rather than products.”
Full servitization refers to having phases one and two done and moving into service models that are centralized around guaranteeing outcomes and defining profitability through meeting those outcomes efficiently.
Outcome-driven customers are looking to develop their strategy for two-year differentiation. This entails creating a segment in your market and basically carving out that segment and being the dominant provider in that segment.
What challenges are servitization organizations facing? These include commoditization; reducing your margins as you’re looking to differentiate, much like the Rolls-Royce example.
You’re seeing your competitors start to create new business models, and you’re seeing how your customers and your partners are responding. Now, you must respond to those pressures as well.
Finally, widespread IoT adoption brings up opportunities and possibilities for new business models that are available for you.
Servitizing customers care about driving long-term business outcomes.
- Chief Operating Officer
What do servitizing customers care about?
Ensuring long-term profitability by:
- Differentiating from competitors
- Increasing top line revenue
- Opening new revenue streams
- Driving business transformation
What challenges are servitizing customers facing?
- Commoditization is reducing profitability and making it difficult to differentiate from competitors.
- Competitors are experimenting with new business models that disrupt the market.
- Evolving customer expectations are increasing pressure to develop and deploy innovative new services.
- Widespread IoT adoption is forcing manufacturers to develop new capabilities to meet customer needs.
- What is our strategy for differentiating from competitors as products become commoditized?
- What role do services play in our long- term business strategy?
- What type of business will disrupt us?
- What’s our plan for new revenue streams?
- Are we developing any product-as-a- service offerings?
- How are we responding to competitors who are developing product-as-a-service offerings?
Servitization Metrics for Optimizing your Profitability and Performance
During a transition to a servitization model, there are key steps you’re going to take, along with KPIs and metrics that are going to help guide and even galvanize the organization to move forward.
The fact that you’re going to move from looking at your internal processes and functions to get closer to customer-facing metrics is where it gets really interesting when you’re moving to an outcome-based service model.
Some examples include SLAs based on resolution time. Instead of time-bound scheduled maintenance, you’re going to start managing based on predictive maintenance alerts.
You’re also going to be looking at moving from reactive to proactive support. This is going to be fundamental in moving to more of an outcome-based model.
Instead of product attached support and services, where you put a warranty on a product for a couple of years and after that, you earn money from service as your revenue model, you’re moving to more of an outcome and service model.
Instead of your field engineers being techs, they tend to advise on how consumption can be optimized for usability and value. Instead of in-house expertise, you’re going to get more outsourcing and partnering with others who are people in your domain that are experts.
Your support organization, instead of it being in one spot in your organization, is now aligned with sales, marketing, and product development. As customers move into an outcome-based model, that changes the way they see their manufacturing process.
The Roadmap to Outcome-Based Service
An outcome-driven model progresses typically as an evolution that takes place step by step. Most organizations tend to focus on their product view. Then, as you make that better, the life of the product gets longer.
Now you need to get better at managing not only the product but also understanding that the service model requires having spare parts available, the right tools, the right technicians available, the right skills, and so on and so forth.
As you become more optimized, you move into more of a static maintenance and service contract. That would be your next step.
Now you need to develop scheduled service, service level agreements, and incident management to help run your service operation efficiently.
The next part of that is to then look at dynamic monitoring and condition-based contracts. What that means is adding telemetry information, connectivity through specific products, understanding the performance of products and understanding how much of that can be incorporated into the way you go to market. That naturally translates to performance-based contracts.
Now, we can say, we know which products perform the best, so we can get into meaningful conversations around performance-based management and contracts.
The last step is where you get into a different conversation at the point where you are selling uptime as opposed to physical equipment. We find that this model is super helpful for a lot of organizations because what happens is this allows you to be laser-focused on understanding and optimizing your product.
Key Steps to Take Towards Uptime-Based Service Models
Phase one is all about optimizing. Here we’re talking about what we consider table stakes, which is understanding your data and your assets. Make sure you are focused on cost reduction, efficiencies, and automation. Make sure you’ve invested in those pieces because those are the ones that set up for further growth down the road.
Establish a single source of truth, standardize processes globally. A lot of organizations work on connectivity without actually taking a look at this section of their business because connectivity seems to be more interesting. We find starting from this phase is valuable because this sets up your baseline platform for success later on.
The second piece is based on understanding how connected devices and processes complement your foundation. One of the most important things here is that the biggest change we’ve seen is how easy it is to get connectivity today.
At this point you can start your feedback loop, leveraging AI, machine learning, Microsoft Azure, and cognitive services. Those are simple examples of things that now have become much more easily consumed by your organization than ever before.
Here is when you get into things like predictive failures. This is when you start to understand anomalies, and this is when your prediction skills really take into account how your assets are actually working.
Finally, here we move into the outcome-based model. This is based on understanding business arrangements that are based on predicting outcomes that scale. Here, you’ve mastered the prediction models, you’ve mastered the service models, and you’ve mastered connectivity. Now, it’s time to take that and monetize and refine that approach, increasing the strategic areas of your business.