Strategies & Challenges in Service Management

2007 RESEARCH REPORT

Table of Contents

About the Publishers 1 2 Introduction Key Business Findings from the Survey 2.1 2.2 2.3 3 3.1 3.2 3.3 3.4 4 4.1 4.2 4.3 5 5.1 5.2 6 6.1 6.2 Customer Support and Services are expecting solid growth Customer Support and Services has to be a profit or business center Customer Satisfaction and Loyalty is a critical success factor Best of Class service at an optimized cost is now an entry level requirement Differentiation from the competition will be on top of Best of Class performance Challenge to support the evolution of converging technologies Challenge to globalize Service Delivery Organization and Part Management Service Delivery and Part Management should be redesigned Understand and manage customer perception about the value of the service that comes on top of the measurable benefits Customers are looking for new services Growth in service Strategies in Service Management To increase service business profitability To develop new service offerings Conclusion

2 3 4 4 4 4 5-6 5 5 5 6 7-10 7 8 9-10 11-12 11 11-12 13 13 13

Challenges in Service Management

Recommendations

Topics for Further Research

About the Publishers

Noventum Service Management Consultants Noventum Service Management Consultants is 100% specialized in Strategic Service Management. We assist large and medium size businesses to strategically differentiate their service business and add more value for their customers. We may assist with developing a service strategy and transforming the business processes, people and information management to Best of Class performance in the service industry. Our service offerings include service performance benchmarking, management consulting activities and knowledge-products for field service, support center and professional services organisations. As partner of Service Strategies, we represent the Service Capability & Performance (SCP) Standards programs in Europe. For more information visit our website at www.noventum.eu or email info@noventum.eu Noventum Service Management Consultants Amsterdam Phone +31 (0)20 312 05 25 Paris +33 (0) 1 5568 1087 Madrid +34 91 503 02 91 London +44 (0)1279 461777

Service Strategies Corporation Headquartered in San Diego, CA, Service Strategies advances service excellence by providing industry standards, career development and strategic advisory services that ensure delivery of consistent, high-quality technology services and support. Service Strategies applies a proven benchmark process to its programs that measures and drives effectiveness for continuous service improvement. Service Strategies programs help improve the service and support operations of leading technology companies worldwide. The worlds leading service and support providers use Service Strategies Service Capability & Performance (SCP) Standards as a roadmap for service excellence and a qualitative and quantitative measure of success. For more information, call 858.674.4864, toll free in North America 800.552.3058, email info@servicestrategies.com or visit www.servicestrategies.com Service Strategies Corporation 17075 Via Del Campo San Diego, CA 92127 Phone 858.674.4864 Fax 858.674.1192

Introduction

Service businesses are responsible for steady growth and solid profits. Across multiple industries and within various market sizes, many product centric companies, which provide technologies to their customers, suffer from pressure on prices and margins due to strong competition and difficulties in differentiating their products. The service business is considered a new driver for revenues, profits, customer satisfaction and loyalty and provides competitive differentiation to avoid product commoditization. Moreover, and although it may be different from one service industry segment to another, the overall potential for growth in technical services businesses is considerable when compared to other business activities. Our research reveals that in order to maintain traditionally high profit margins, service executives are now challenged to build cost efficient delivery organizations and to use them as a foundation for future growth, thereby enabling them to support the rapid evolution of converging technologies and multi-vendor, multi-product services. At the same time, intangible benefits are becoming more important as they are the source of competitive advantage for many service businesses. Both the technical and soft skills of service employees are instrumental in delivering such intangible benefits through increasingly customized and complex services.

However, such strategies may not be sustainable as the demand for highly skilled service employees is threatening to outstrip the supply in Western Europe and the United States. Executives from field service, parts management, support services and professional services organizations will benefit from the insights provided by their peers who participated in this survey, of which a significant majority hold senior, influential positions in their respective companies. More than 130 participants from around the world have contributed to this study, which consisted of online questionnaires followed by several in-depth interviews with managers and executives. The participants represent a wide range of industries and geographies and encompass an even spread of organizations in terms of size. Our analysis of the survey results, in combination with in-depth interviews and the collective knowledge and experience of consultants from Noventum and Service Strategies, resulted in this report on the Strategies and Challenges in Service Management.

Key Business Findings

2.1 Customer support and services are expecting solid growth More than eighty percent of the respondents say that the company they work for is growing in both revenue and profit. Almost half of those say that growth is expected to be more than 10% annually. Service is a strong driver of growth, but in particular, a strong contributor to corporate profits. The average contribution to the entire business is approximately 30% and continues to grow. 2.2 Customer support and services must be a profit or business center Customer support organizations are in transition from a simple cost center supporting warranty obligations, to a profit center accountable for service revenues and profit objectives. As a result, corporate strategies are evolving from a product centric business model to a product and services business model. This implies many changes are occurring within companies, such as changes in R&D, manufacturing, marketing, sales and service delivery.

2.3 Customer satisfaction and loyalty is a critical success factor Seventy-five percent of respondents consider that their primary business objectives are to improve customer satisfaction and retention. Customer Lifetime Value generally grows quickly when satisfied customers do not need a lot of convincing, hence reducing the cost of sales and increasing revenues per customer. Increasingly, it is the customers perception about the value of the service rather than just the easily measurable benefits that drive customer loyalty.

Challenges in Service Management

3.1 Best in Class service at an optimized cost is now an entry level requirement A key concern of service executives is the ability to deliver support, services and parts in accordance with SLA contracts; driven either by customer demands or by increasing competition, the standard has become to deliver more for less. Best in Class performance has become an entry-level requirement in many industries. While the investment in achieving such high levels of performance is necessary to enter and maintain a strong position in the market place, it is not enough to achieve better than average financial results. Service organizations must develop innovative delivery processes to ensure that they are reaching their maximum potential. Service executives recognize that getting the right person and/or parts in the right place, at the right time, and at the right cost, will depend on a redesign of their current service delivery value chain. Survey participants commented: We feel pressure at both ends of the spectrum. Services that customers want and services that we effectively can deliver. The full chain of service delivery and its connection to the service offering has to be reviewed to deliver cost efficiency and value to customers.

Only when you are able to identify the correct resources, plan for the future and then achieve the highest productivity level will it result in a profitable and competitive organization. 3.2 Differentiation from the competition will be on top of Best in Class performance In some market segments such as IT and Office Systems services, customers are having difficulty differentiating service providers. On top of increasingly similar tangible benefits, some service providers are able to differentiate themselves by focusing on the intangible benefits of their services. These intangible benefits, are very real and address risks or uncertainties that a service provider is able to manage for the customer. Increasingly, the perceived benefits create the difference on top of measurable Best in Class service performance. 3.3 Challenge to support the evolution of converging technologies Service employees are having difficulties keeping up with the dazzling speed of the technological evolution. The need for deeper technical specializations is changing the economics of service delivery. Converging technologies (electronics, IT, telecom, mechanics, etc.) require completely different skills sets, such as integration specialists and project managers. Multi-vendor environments and a proliferation of partners require partner management processes and new managerial

Challenges in Service Management

skills. Roughly half of all respondents mentioned skill shortages as a major obstacle to growth. Common issues are employee loyalty, keeping technical skills up-to-date, workload issues, etc. Survey participants commented: We need to develop people skills at a similar pace as the speed of technological change and evolving customer demands. We need to convert product-oriented thinking to service-oriented solutions. 3.4 Challenge to globalize service delivery organizations and Parts management Although the survey respondents are often working at a nationwide level, their companies operate at a worldwide level. More and more international customers require a high level of consistency in terms of delivering service and spare parts across countries. While providing another opportunity to differentiate oneself in the marketplace, it also creates new challenges. It is not only an exercise in standardization to find economies of scale and to optimize cost. Sensitivity to different customer needs requires finding the right balance between what is done locally and what in done at a central level.

Survey participants commented: We need a European organization that can act as a headquarters but also should assist local entities and facilitate the learning from each other. Outsourcing and partnering at the European level is becoming the norm - deploying productivity tools at the European level to achieve economies of scale is the only way to reduce service delivery costs. We are re-aligning the European organization in line with a complete new business strategy to transform the current business model towards a common European model coming from a local/decentralized model. We will use more partnerships with external companies to boost efficiency, improve service levels and cost/profitability.

Recommendations

4.1 Service delivery and parts management should be redesigned Service delivery and parts management should be redesigned in order to cope with the major strategic challenges which are to:
Continuously manage cost efficiency.

Considering the dynamics of the service industry, it is often a strategic advantage to move from a fixed to a variable cost model, making use of business partners integrated into the service chain, distinguishing centralized capabilities versus local capabilities and making use of low cost channels whenever possible. New information technologies and sharing of best practices make it feasible to create a seamless virtual organization in which partners in the service value chain can work together on a worldwide scale. A European Service Director of a major Japanese consumer electronics company commented: We balanced centralization versus localization of service .The centralization brings potential economy of scale and harmonization of service levels while localization brings more flexibility and closeness to customers. Service delivery and parts management has to be orchestrated through a cohesive Service Life Cycle Management process in

order to plan, introduce and monitor service and product quality and costs. The life cycle management process will determine appropriate actions necessary to optimize costs and customer satisfaction throughout the full life of the technology service. Technologies and systems for designing, managing, and optimizing service and parts operations have significantly improved the ability to manage overall service performance.
Support the evolution of converging

technologies with new services. Customers that do not possess the knowledge and skills to support new technologies increasingly depend on their service providers. It is necessary to create new service offerings that encompass multi-product and multi-vendor technologies. These new service offerings may require innovative approaches to effectively support customer needs. While such services may improve growth prospects, service providers will likely assume greater risks associated with increasing complexities. What is now considered Best in Class in single service propositions needs to be re-designed for multi-services and eventually integrated service propositions.

Recommendations

Manage the increasing shortage of qualified personnel. Dependence on highly skilled individuals should, in any service business, be reduced to a minimum. Technology solutions such as increased use of remote accessibility, mobile communication and knowledge-based technologies can be instrumental in concentrating critical knowledge in support centers rather than having such knowledge dispersed in the field. Field Engineers should be trained and supported to possess more problem resolution process skills rather than purely technical skills. The increasing importance of perceived value underscores the need to focus recruiting on soft skills such as effective communication, problem resolution, collaboration, and commercial account management skills, which can be more difficult to develop than technical skills. Undeniable demographic data and shifting interest from young people that choose non-technical education makes it clear that new products, service processes and skill profiles should be designed for a minimum requirement of technical skills. Service organizations that have not already done so, should consider moving employee satisfaction and loyalty programs even higher on the corporate agenda than customer loyalty programs.

Manage the expanding scope of services.

Service organizations should differentiate pure product support and service with system or environment support and service.

Product support is a matter of processes, IT infrastructure and knowledge management tools more than skills. It is a recurrent business, highly replicable, highly centralized, using low cost channels, mainly driven by incident. The environment or system support business requires deeper skills, is less replicable, less centralized, is driven by projects and should incorporate advanced account management processes that foster a close relationship with the customer. Both types of support and services should be bundled as far as possible to ensure profitable business for the service provider and maximum value for the customer.

4.2 Understand and manage customer perceptions related to the value of the service that comes on top of the measurable benefits Understanding and managing customer perceptions provides possibilities to differentiate ones business from the competition. The whole process of managing customer relations, satisfaction and loyalty should be redesigned. In the development of a customer relationship, skills, processes and tools that are designed to

Recommendations

cater to the specific customers needs should support the personal and collective behavior. A Europe Service Director of a major Japanese consumer electronics company commented: The challenge is to understand well what consumers really value in service -based on consumer surveys we know that, in general, quality and speed at a reasonable cost is the most important driver of customer satisfaction. However further detailed segmentation of consumer profiles might bring different conclusions. For example, affluent professionals might value more extended hours of operation versus cost, while less affluent middle class consumers may value cost against hours of operation. The challenge here is to segment service according to consumer profile. We recommend three steps in the customer relationship process: As a first step, help set the customer expectations that will qualify the service provider to become a supplier of choice. Secondly, deliver a service in line to meet the expectations and commitments. Thirdly, extend the customer relationship by understanding their needs and addressing the factors that will strategically differentiate the service provider from the competition. Real differentiation and added value comes

from a profound understanding of the customers business in terms of measurable and intangible benefits. This is a key challenge, since it is often almost countercultural for techno-centric organizations to engage in a customer-caring focus. For many companies, this means adjusting their training programs and seriously spending time on coaching and development of the service personnel. Herein lays the real opportunity for those who see the possibilities to differentiate their offerings and ensure a high level of customer loyalty. The Director of a global technical support centre of a major Telecommunication Equipment Manufacturer commented: We have changed our support model to a collaborative approach by having teams dedicated to specific products to take ownership of customer issues and drive them to resolution. These teams are now located in a Global Technical Support Centre rather than distributed using a follow the sun model. This was in response to customer feedback to improve resolution time. By using this process we have laminated the need to hand issues over to different locations, they are owned by one team. 4.3 Customers are looking for new services Customers are looking for new services that cover the full scope of their support and

Recommendations

service needs. Customer needs can be distinguished by thinking in three layers of services: the product, the environment, and the customization. The product layer may be covered through web services. This type of service must be technically rich, delivering productivity improvement by allowing customers to tap into knowledge-based systems, parts commerce, real-time data and shared transaction systems. Web services must be an integral part of the service portfolio. This is a very effective way to create technology-based services that customers can directly use to enhance the product performance. The product layer services are for products:

such environments or systems can be configured or set-up for different purposes the user typically is a qualified persons that has undergone specialized training in order to operate and maintain the environment or system installation, set-up and (re)configuration typically is not done by the user and requires specialists

The customization layer describes situations where:

by thorough understanding of a customers needs and processes a service provider can create service propositions that address needs that are rather unique for one customer or a limited group of customers. by addressing these special needs significant value is created for the customer (tangible and intangible benefits).

that typically operated in a stand-alone mode that typically are set-up for a single purpose do not require highly specialized training for the users of the equipment in order to operate it whose users are involved in simple configuration or maintenance activities

The environment or system layer and customization layer provide progressively more possibilities for strategic differentiation than the product layer. This model for offering development is a permanent balance between product packages that are fully replicable, with the profit coming from high volumes, and at the other extreme, customer agreements not replicable, with the profit coming from value to the customer.

The environment or system layer services are for situations where:

several products operate in conjunction with each other as a system or application

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Conclusion

5.1 Growth in service Growth in the service and parts operation often exceeding ten percent annually is usually far above the primary product business results. The service and parts operation revenues and profits have been improving significantly and are more and more seen as a strategic part of the business. Senior executives understand that improving customer satisfaction and customer loyalty is a result of the perception of the total customer experience rather than only measuring tangible benefits. Senior executives also better understand that loyalty associated with services will consequently increase product loyalty. Growth and profitability prospects in the medium and long term are endangered by: Increasing customer expectations that are difficult to satisfy with the available service business models. Commodity type service propositions that do not address customer needs appropriately and will not create sources of long term differentiation. The need for new skills, caused by rapid technological evolution of converging technologies, involving more account and partner management skills, which will be difficult to find in typically product techno-centric support environments.

5.2 Strategies in Service Management For the first time in years, we note a shift in priorities among service executives who are shifting traditional investments from infrastructure such as equipment and technology towards investments in training and staff development programs. Infrastructure and people now receive equal levels of investment. Total levels of investment have been growing with 10% or more compared to the 2005 level. However, reallocating investment budgets to skills development is not enough. What is required in many companies is a fundamental redesign of the service delivery model: Best of Class performance has become an entry-level requirement in many service industries. Wide-spread adoption of Service Industry Standards will be instrumental in achieving this. Strategy, processes, people, and systems need to be re-designed to deal with the considerable opportunity brought by the rapid evolution in converging technologies. Skill shortages have become a major risk factor. Such risk can be reduced by redesigning the service delivery processes and systems to reduce the dependency on product qualified workers where possible, and by increasing the supply of technologies and management qualified staff with

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Conclusion

appropriate customer oriented training and development. Development of new Service Propositions should expand the scope of services provided and address customer needs resulting from converging technologies. New service propositions should address integrated service needs including multivendor, multi-technology applications and should focus on adding value to the customers processes. Thinking in terms of a product layer, an environment layer, and a customer layer helps in defining the service proposition holistically. New service propositions should be designed with a global market in mind. Account management, including partner management is also a key part of this value proposition. They should be highly scalable using standardization in increasing global service delivery organizations but should be sufficiently adaptable to individual customer requirements. In the context of corporate strategy, Service has attained a position of serious focus with commitment at the top, but in many organizations, there is still some way to go before Service is fully understood by senior executives and in the boardroom. The majority of respondents in our survey indicated that they do not perceive full support from senior executives for their strategic service plan.

Going beyond product centric thinking seems to be a real challenge. Notwithstanding this, it is an undeniable fact that technology based services are a key enabler in the overall service market. The service is no longer at the periphery of traditional product centric companies. Their business models are now product and service centric. This is being driven primarily by customers re-thinking of where value truly lies. Companies that are able to adapt their service business models to deal with new customer needs and can manage the dependency on highly qualified employees will be able to enjoy growth in service revenues at healthy profit margins.

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Topics for Further Research

Noventum Research will continue on the topics mentioned below. A number of hypothesis were created that we intend to research. Results will be communicated through conferences, management master classes, leadership roundtables or published reports. Those interested in participating in this research should contact info@noventum.eu. 6.1 To increase service business profitability Move fixed service costs to variable costs to ensure a flexible cost model. Centralize and share capabilities to gain economy of scale. Define and execute Knowledge a Management strategy for a cost/efficient support. Create a service life cycle management process to manage service cost and revenue during the end-to-end service life. 6.2 To develop new service offerings Integrate technology convergences in new service offerings to answer new customer needs and demands. Develop technology professional services to answer additional customer needs like account and partner management.

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