I’ll start by explaining the business models that service organizations are burdened with. They have two types of customers: those on contract, and those off contract. Sales divisions are asked to sell service contracts because they’re intrinsically high-margin, and in some cases, 100% margin if the customer never calls for support. And yet, once the equipment sale has been made, if the customer is on contract, the service organization is incentivized not to come out and actually service the customer. Why? Because the trip is purely a cost and is eating into what was 100% gross margins. I’m not suggesting that service organizations act unethically and violate service contracts by not sending staff out; rather, I’m saying that on a marginal basis, with a service contract in place, service organizations would rather not come on site to service a customer than come on site because on-site trips incur significant costs that cannot be recouped on a marginal basis.
On the other hand, service organizations are happy to service customers who are off contract. Why? Because the service organization can gladly mark up the cost of the ad-hoc visit to cover the marginal costs of the trip. For off-contract customers, service organizations profit from every service trip. The irony of this is that although service organizations profit from servicing off-contract customers, service organizations are always trying to upsell service contracts!
Thus is the paradox of service organizations: they’re incentivized not to service their best customers – those who have agreed to pay for a service contract – and are incentivized to service their worst customers – those who won’t pay for a service contract.
How did these incompatible models come to coexist?
In short, the current divergent business models are based on legacy assumptions. Decades ago, field service was different than modern service:
1) equipment wasn’t as complicated, and was thus more capable of being fixed by local technicians rather than experts employed by the manufacturer
2) there were fewer electronics. Electronic components are increasingly difficult to fix by non technical experts, requiring professionals with entirely new skill sets
3) customers were less demanding in terms of guaranteeing reduced downtime and response time
Over the last few decades, these assumptions have broken. Equipment is more complicated than ever, and businesses are increasingly less willing to deal with downtime. Despite these changes, the field service model hasn’t materially changed. Service organizations still try to up-sell service contracts, and still do everything they can to avoid on site trips since on-site trips are so expensive on a marginal basis.
The output of the structural changes is that field service has for many organizations devolved into a cost center, or at best a marginal profit center. But given the antithetical models that service organizations have to house, service has lost strategic relevance.
In the next post of this two part series, I’ll explore how some of the leading equipment manufacturers and their service organizations are re-inventing their service models to align with customers more effectively, and as a result, drive strategic value of service organizations.
CEO @ Pristine
Subscribe to The Pristine Story