The world is changing at an unprecedented rate. From technology, education, and healthcare, to energy, politics, and the economy – there’s hardly anything in life or business that’s staying stagnant. We’re experiencing demographic, economic, political and social changes that will serve as catalysts for massive transformation across diverse industries in the coming year, and this transformation is all thanks to the technological revolution that’s fundamentally altering the way we live, work, and communicate.
The scope and scale of this transformation will be like nothing we’ve ever experienced and will leave few industries and business functions untouched. But one critical business function that is ripe for transformation is after-sales service – the service original equipment manufacturers (OEMs) deliver after the initial sales of their products.
Service is the new product
Over the past several years, volatility in equipment orders, diminishing margins and decreasing new equipment sales have caused many OEMs to pause and evaluate their futures. Unfortunately, many are faced with uncertainty, forcing them to explore new business models and sources of revenue and profits. The more innovative manufacturers are shifting their focus from the new product side of their business to after-sales service, where margins are much higher.
In fact, McKinsey & Co. recently revealed that upwards of 15% of OEMs’ total revenues come from parts and service, while a Bain and Co. report suggested that service has an average gross margin of 39%, which is significantly higher than margins on most new manufactured products. So, as these product-based revenues decline and margins diminish in maturing industries like high-tech, aerospace, motor vehicles and consumer and industrial products, after-sales service margins remain healthy. Simply put, service revenue is more predictable, making it the attractive choice during these rapidly changing times.
With this shift in focus to after-sales service, 2018 is well positioned to be the breakout year for the transition from a break-fix service model to a model focused on maximizing product uptime. Fueled by factors like the aforementioned declining product margins, changing customer demands and declining tech costs, these accelerations are already gaining momentum on the service side of the house when it comes to finding new sources of revenue and profit.
In today’s changing world, though, product advancements alone will not enable manufacturers to gain or sustain the competitive differentiation needed to ensure long term financial performance. Shifting from a product-led growth strategy – which has sustained OEMs for many decades – to a service-led growth strategy will require OEMs to embrace change, think differently, act differently and embrace technology to completely transform their after-sales service functions.
And, transforming service into the new product can’t be achieved by simply doing the same things better. OEMs need to start viewing their service organizations through completely different lenses to remove the historical constraints limiting innovation and the speed of adoption. OEMs that build a culture around maximizing product uptime and delivering exceptional after-sales service experiences will be the early adopters of technology, and the first to start reaping the rewards.