In our final installment of this series Strategic Assessment of Outsourcing Part IV, we will be reviewing the vendor selection process and summary recommendations.
We begin with outsourcing vendors and a recommendation of selection factors to consider in making the best vendor selection possible. A plethora of vendors are available to support customers’ outsourcing needs; and with so many alternatives available, it becomes increasingly more difficult to select the "best of the best" when outsourcing. Once the decision has been made to use an outsource vendor, a systematic approach is also needed in selecting one.
Outsourcing Vendors Selection Factors
The first step is to determine what skills, activities, and physical assets will be required to perform the function. This must be evaluated in terms of:
- personnel requirements
- experience levels
- technical capabilities, tools, information systems assets
- skill levels
Once defined, the outsourcing firm now has an understanding as to exactly what the specific function requirements are to buy from an outside vendor.
The next step is to determine the goals and objectives of outsourcing. For example, by outsourcing, is the company trying to:
- minimize overhead and technology costs
- grow its customer base through service expansions into a lucrative market with limited competition
Once the outsourcing firm understands its function requirements needs and what results it is attempting to achieve, it can now begin to evaluate alternative vendors. In evaluating vendors, it is important to understand why outsourcing deals can fail.
Why Outsourcing Deals May Fail
- the vendor lacks depth and breadth of service capability
- lacks the experience
- cannot provide the day to day data and information that customer needs to monitor quality of service
- cannot provide the full array of services to support all the components of the function being outsourced
In essence, outsourcing contracts fail because vendors cannot deliver on their promise. Qualified outsourcing vendors should possess the following characteristics (see Figure 9):
The most important characteristic is financial solvency. Because outsourcing deals can be long-term, it is critical that the vendor has financial strength. Knowledge of the customer’s business is also an important criterion. It is not only important that the vendor is skilled and experienced in performing a function, but that he understands his customer's goals, objectives, mission, and culture. Above all, the outsource relationship requires collaborating.
In addition to possessing these qualities, the vendor must be able to provide outsourcing customers with a commitment to quality improvement and customer satisfaction, as well as the commitment to technological innovation. These commitments need supporting with a requisite level of performance guarantee and include incorporating new technology in performing the functions as the technology becomes available. The vendors should be able to provide and demonstrate an understanding of your business and offer customer references to demonstrate a record of accomplishment of success.
More Vendor Differentiating Features
A further means of differentiating superior vendors from average ones is to determine whether the vendor possesses any unique service capabilities. This may include a leadership position in developing a specific technology or possession of expert knowledge in performing an industry-specific, narrowly focused task relevant to the function. The vendor’s knowledge of dynamics and requirements of specific markets is also a key differentiator (i.e., vertical market focus).
In addition, the ability to provide a full-range service portfolio can be a distinguishing factor in the end, especially if the customer has plans to outsource additional activities in the future. The quality of the vendor’s information system can also be a make or break factor, since the vendor is viewed as an extension of the outsourcing company’s business and must provide visibility into day-to-day transactions and service performance metrics.
Finally, the vendor’s long-term commitment to the outsourcing market should be the prime differentiator. Look for evidence of historical presence, current commitments, and articulated long-range mission, vision, and strategy.
Vendor’s Perspective
From the vendor’s perspective, it is good to understand that customers are always delighted when they receive more benefits and results than they expect. This is a critical rule in outsourcing since there is a lot at stake when a function is outsourced.
Customers trust the vendor to run a portion of their own business and will expect more from the outsource vendor than they will of their own employees. Good outsource relationships provide the customer not only with short-term solutions, but they produce measurable results and improvements in both short and long term. Winning outsource contracts (see Figure 10) express this principle.
FIGURE 10
They offer shared savings from improvements in technology and specify the commitment to technological upgrades as they become available. However, it is good business for the vendor to describe anticipated improvements in general or qualitative terms, rather than in quantitative terms, unless there is absolutely no risk to the vendor or customer in achieving these goals. A final point of advice is that good outsourcing contracts should offer flexibility by enabling customers to modify or terminate contracts under specifically pre-defined circumstances. Good outsourcing deals provide for a sharing of risks and returns between the two parties.
Summary & Recommendations
In summary, most large service organizations and many middle size groups are now engaged in an in-depth analysis and evaluation of the opportunities for cost reduction and productivity improvement through outsourcing and downsizing, and many outsourcing vendors are moving into this market.
Overall, the possibilities and options created by outsourcing have affected our traditional notions and approaches to conducting business. The conventional wisdom for many decades has been to maintain tight-fisted control over all the functions, activities, and processes operating within an organization. Economic uncertainties, corporate downsizing trends and competitive pressures, have forced managements, executives and gurus to re-think this philosophy.
Executives must now evaluate business functions and processes based on productivity and efficiency contributions, and more importantly, consider their strategic value to the organization. Outsourcing provides a means for an organization to continue to operate functions necessary for business survival but delegate the burden, responsibility, and risk to an outside party.
In the past, “make versus buy” decisions were focused at the activity level when costs were an issue. Today's economic reality has moved the “make versus buy” decision from a tactical consideration to a full-blown strategic analysis and evaluation of the cost and benefits of operating a function internally versus contracting with an outside party. On the other hand, market dynamics permit greater options than merely subcontracting commodity-like activities to an array of vendors with similar qualifications.
Today, an organization can outsource to a broader array of providers, not to mention, of course, their own competitors. Likewise, the vendors themselves can outsource, and/or collaborate, with other vendors to create customer solutions. In essence, outsourcing has created a paradigmatic shift in the way we conduct business by permitting our competitors of the past to become our customers of today, and our customers of the present to become our partners for the future.
Recommendations
However, it is essential for the service organization, which is considering outsourcing to understand the need for a quantitative, in-depth, professional, and objectively conducted consultative evaluation process, as broadly outlined in Figure 5, in order to arrive at the optimum decision and solution with respect to cost reduction and efficiency and profitability improvement, relating to:
- growing the service organizations to achieve significant economies of scale
- outsourcing and/or subcontracting of key service functions and processes to reduce costs
- forming a joint venture/partnership relationship with another service organization to gain both economies of scale, and the ability to sell excess or unutilized time through an increase in the direct business base and service portfolio
Take Away
It is clear that the general trend towards service outsourcing and downsizing will continue as service organizations attempt to improve their productivity, efficiency, and profitability. Our Strategic Outsourcing series provides a decision-making framework, key points, and concepts that professional consultants employ in evaluating outsourcing options and alternatives. If you would like guidance in executing your next outsourcing decision, please feel free to contact us for an insightful free 30-minute consultation.
Related Information
Strategic Assessment of Outsourcing Part III
Strategic Assessment of Outsourcing Part II
Strategic Assessment of Outsourcing
Strategic Assessment of Outsourcing Part Three examines the best practices for strategic management decision making regarding outsourcing. In Part II, we continued to explore insights into the strategic assessment of outsourcing for OEMs, distributors, and third party service providers.
Now in Part III we will be examining the overall process for decision-making support of the strategic issues of service outsourcing and downsizing.
In running and managing a business, executives typically examine a function from the perspective of cost and capability to determine, which tasks and activities can be performed efficiently and proficiently by internal personnel, and which tasks and activities an outside party could more effectively handle. In essence, executives conduct a "make versus buy" analysis at the task or activity level, in order to determine whether to contract with an outside vendor. Some people will point out that this process is a form of outsourcing. However, outsourcing involves much more than subcontracting individual activities to reduce costs.
A more accurate definition of outsourcing would be contracting the management function and its associated components to an outside party who can perform it on a more proficient and efficient basis than the outsourcing firm. This slight distinction is evident in the example of a Fortune 500 company who contracts with a third party to manage mailroom operations and maintain related technology versus a firm who contracts with the manufacturer of postage meters to provide hardware maintenance and support on this equipment. In essence, outsourcing involves delegating to a third party, the responsibility and authority for managing and operating a portion of the outsource firm’s business at an agreed upon fee for a fixed time.
In essence, the key approach to determining the optimum outsourcing and downsizing strategy to improve general efficiency, effectiveness, and reduce cost, is outlined in Figure 4 below.
The first step is to determine the criticality of the service to your core business based on an evaluation and analysis of service performance benchmarks and customer satisfaction data. If the service is critical and performance is excellent then all that is needed is to develop an action plan that will continue to optimize that service business.
If the service is not critical or a poor performer then it is a candidate to consider outsourcing or subcontracting all or parts of that service business. The next part of the decision tree focuses on the efficiency of the business. A low efficiency, service business assessment would suggest subcontracting all or portions of the service functions out to an experienced subcontractor or third-party vendor.
If the service is operating at high efficiency then considering a joint venture with an experienced efficient, service provider maybe the best option for the business.
Both, the low or high efficiency, service business evaluation will require an optimum action plan and schedule of activities to close the loop on a successful action plan in making the best decision possible.
Under this process, information is collected on trends, service performance benchmarks, customer installation base, levels of service, perceptions and assessment of service criticality, and "best in class" vendors, viewed from the perspective of the service end-user.
FIGURE 5
Key Decision Model For Use In
Outsourcing & Reducing Service Costs
In figure 5, we see a decision structure necessary to evaluate the appropriate course of action based on the results of both an external market survey of customer requirements and a benchmark survey of internal productivity and efficiency versus industry standards.
This leads to the ability to assess these findings based on the customer perceptions in relation to the efficiency and productivity of the service business versus industry standards. Armed with this knowledge a company can now make the best decision possible to maximize service profitability.
The pursuit of the process methodology, as outlined in Figure 6, by an experienced professional consultant or consulting organization working closely with the client company, should result in a rapid assessment and evaluation of the options and alternatives.
Take Away
Decisions related to outsourcing, subcontracting and downsizing should begin by first analyzing and evaluating customer requirements and service criticality. The next step is to conduct both an internal survey/benchmark analysis and evaluation, and an external survey of the customer or user base. These first two steps establish the key parameters to evaluate your survey and benchmark database to formulate various decision models producing a rapid assessment and evaluation of the options and alternatives. Need help, we can guide your evaluation process for decision-making support of the strategic issues of service outsourcing and downsizing contact us now.
Related Information
Strategic Assessment of Outsourcing Part II
Strategic Assessment of Outsourcing Part I
Everyone is talking about the influence of cloud services and mobile computing on industry communications and business. Here is what I just heard.
One quick note, for those that have been following our series Strategic Assessment Outsourcing we will retun to the next installment in that series in our next post.
I had the pleasure to attend the CompTIA Annual Member Meeting earlier this month. The buzz at this conference was on the subjects of Cloud Services and Mobile Computing. Obviously, these issues are ubiquitous throughout industry. In the past, most of the conversations have been about how great the technology is and what it can do for us in terms of delivering services. To be honest, up until this event I have not heard much discussion about how the nature of IT Services would or could change in this new environment. The CompTIA meeting was refreshing because it did address these issues.
As far as the Cloud is concerned, many conference participants believe that the Cloud is here to stay. However, rather than viewing Cloud as a threat, most people are bullish that the market will adopt private cloud solutions as opposed to public cloud. Perhaps, this is a dream? With a private Cloud, IT service providers can continue to offer billable IT services to their customers. On the other hand, the public cloud poses a risk to this income stream. Conference participants noted that the migration toward private cloud will also require some degree of creativity in terms of creating new billable service offerings. New skill sets will also be required to sell and deliver these new services.
With respect to mobile computing, the CompTIA audience recognized that smart phones and tablets are proliferating and in some cases replacing traditional computing devices like, Handheld Computers and Desktop/Laptop computers. There was also recognition that many employers are enabling BYOD, (Bring Your Own Device) environments. Given these trends, there was speculation among the CompTIA audience as to whether mobile computing represented an opportunity for IT Services Provides. Concepts such as Mobile Device Asset Management (MDAM) and Mobile Application Management Services were receiving a lively discussion as billable services appropriate for B2B customers.
On the other hand, some claimed that the proliferation of enterprise mobiles apps and BYOD eliminates the need for these services altogether. Can both environments exist simultaneously? Are we trying to solve a new challenge with an old school solution with MDAM? Is it really just a matter of time before, before all organizations adopt BYOD policies and deploy mobile enterprise apps solutions? Let me know you thoughts.
Take Away
Cloud and Mobile Computing are not necessarily disruptive to the IT Service Market and do not have to be viewed as such If they, create opportunities for new billable services. However, new skills are needed to market, sell, and deliver these services. A management consultant who understands the marketplace needs and has experience with cloud and mobile computing technologies could help you monetize these services quickly. Please feel free to contact us for more information.
We'll be back shortly with our Part III of Strategic Assessment Outsourcing.
Related Information
Impact of Cloud Computing on Reverse Logistics
Field Service Cloud Computing Survival Strategies
Service in the Clouds: A new paradigm for Aftermarket Service- Part 1
How to evaluate the decision to outsource consider the pros and cons a strategic assessment of outsourcing.
In Part I of this four-part blog series we helped organizations to outsource Aftermarket & Reverse Logistics services, as well as review the key steps and decision paradigms and parameters that support the decision making process in the strategic assessment of outsourcing.
In Part II, we continue to explore insights into the strategic assessment of outsourcing for OEMs, distributors, and third party service providers.
A. Outsourcing May Not Be for Everyone
The concept of outsourcing is not for everyone; as shown in Figure 2, there are both advantages and disadvantages.
Figure 2
Pros and Cons of Outsourcing
There are a number of risks in outsourcing which may create perceived disadvantages. However, these disadvantages are mostly of a psychological nature and if managed effectively, do not lead to financial losses. For example, collaborating with a third party introduces a host of new outlooks, personalities, and demands that can produce new problems. These challenges include:
- a more complicated level of communication
- insecurity in the workforce
- the risk of alienating customers
Therefore, systems and procedures must be put in place to monitor and evaluate the performance of vendors. However, developing these systems can be a difficult task for some.
The biggest obstacle to outsourcing is that it requires a change in management mindset. Many managers fear the loss of control or conflict of interest and fail to compare the cost and benefit of using outside suppliers with the cost and benefit of using internal support organizations. Managers faced with an outsourcing decision often construe the financial cost and loss of control over individuals as their justification for not outsourcing, but fail to consider the long-and short-term improvements and results, and the indirect financial benefits and long term savings to the organization.
Furthermore, good outsourcing agreements allow the client to request the employee or service provider be replaced if they are unhappy with them. Unfortunately, motivating employees and effecting change within internal support organizations is not as easy. In essence, the risk associated with outsourcing can be offset and controlled if managed properly.
B. OUTSOURCING DECISION CRITERIA
Obviously, a number of good reasons exist and arguments can be made for outsourcing, particularly because outsourcing can lead to a 20-40% reduction in costs. This benefit is among the major reasons why so many companies in a downsizing or rightsizing mode have become involved with outsourcing.
However, outsourcing is a good management tool in a number of other scenarios. Companies operating labor-intensive businesses who experience sharp, steep learning curves can find benefits and requirements change very dramatically because of seasonal or cyclical factors.
Many companies are enamored by the perceived benefits of outsourcing and are planning to outsource. Other organizations are stepping on the outsourcing bandwagon because it seems as though it is the "thing to do" under current economic conditions. An initial perception is that just about every function and activity in the business can be outsourced, ranging from technology-oriented functions such as:
- to pure service functions such as supply chain management & accounting
In light of the number of potential pitfalls and disadvantages discussed above, not every function should be outsourced. However, except for conventional wisdom of supporting core businesses internally and outsourcing functions that are not central to business, very little guidance has been provided to executives on optimum outsourcing and decision criteria.
In essence, conventional wisdom does not help an executive determine what functions are “core” to his business. For example, in the high-tech equipment service business, depot-repair center functions were considered a primary center to firms providing field maintenance and support just a few years ago. Now many firms in this business are questioning whether depot repair is a “core function” to the field maintenance business.
This has been a very difficult question to answer; particularly in light of the fact, that many companies have opted not to perform these functions internally. On the other hand, this trend does not necessarily mean that depot repair is not a core business function to all organizations operating within the general industry. Some equipment service organizations may find a competitive advantage by performing depot repair functions through internal operations, while others may find no economic justification for doing it themselves. Clearly, some level of strategic business planning is required; otherwise, outsourcing would become a haphazard process at best.
A strategic approach for evaluating the decision to outsource against several key factors is shown in Figure 3. These factors should be evaluated in a logical sequence as follows:
• Customer view of function
• Capabilities and physical assets required to perform function
• Technological requirements
• World-class abilities
• Performance and delivery capabilities versus
competitive alternatives
• Time and cost required to close performance gaps
• Long term commitment
Figure 3
Outsource Decision Criteria
In evaluating a business function, companies should elect to perform internally, when the following criteria are met:
1. Customers are concerned or affected by the process of the functions performed. In essence, the function creates a key differentiator.
2. Specialized capabilities and physical assets are required to perform the function for which there are few qualified independent providers.
3. Performance of functions requires relatively high technology and possession of that technology can be a clear advantage to the owner.
4. Resources and capabilities exist to achieve world-class performance.
5. The organization maintains a leadership position versus alternative sources of delivery.
6. The internal source is clearly at a competitive cost advantage over external suppliers and/or the rate of improvement in any performance gap is relatively high.
7. A long-term commitment exists by senior management to provide this function internally.
On the other hand, outsourcing becomes a more viable consideration under the following circumstances:
1. Customers are concerned with the outcome of the functions performed and
pay little attention to the process
2. Capabilities are readily available in the mass market and proximity or access to the customer is not an issue
3. The technology to perform the function is very stable
4. World class performance is not a critical success factor
5. External vendors are clearly more competent
6. Significant capital & resources are required to improve any performance gap
7. Organizations have plans to harvest or exit the business in the near future
Takeaway
The fact that other organizations within the market choose to outsource is of no consequence. However, a vendor who can provide a consultative approach to existing customers to make the optimum outsourcing decision is more likely to gain new business than a vendor who does not. However, this approach requires an investment and commitment to a long sales cycle. Although an opportunity exists to provide planning services to perspective outsource customers, this item appears to be a “loss leader” at best.
Stay tuned Part III of our series is coming up.
Related Information
Strategic Assessment of Outsourcing Part I
Insights into the strategic assessment of outsourcing for OEMs, distributors, and 3rd party service providers.
This first part of a four-part blog series will help organizations to consider outsourcing options, as well as review the key steps and decision paradigms and parameters that support the decision making process to outsource Aftermarket & Reverse Logistics services. We will address the perspective of both, the outsourcing firm and outsourcing vendors.
The Theoretical Decision Structure in Considering Outsourcing In Service
The issue of outsourcing and downsizing is more complex than most describe. It is not simply a matter of deciding whether to outsource or not. This is particularly true of service issues, the usual focus of outsourcing. The question of outsourcing requires carrying out a strategic assessment and evaluations in which a number of factors need consideration, key among them are:
- The importance of service to the organization's customers & users
- The market or the use community’s observed perception of the vendor’s service quality & responsiveness
- The current levels of service efficiency & productivity compared to other equivalent service organizations in the market
These key issues in turn will determine whether an organization would be prudent to make any strategic changes (to outsourcing) in order to significantly reduce the firm’s costs and improve flexibility, efficiency and performance. In fact, there are three ways to do this:
1. Significantly grow the service operation beyond the areas of product support. Specifically, the company would develop product lines or new technologies to build a comprehensive multi-vendor service (MVS) service concept. The result of this action should be a significant increase in the economies of scale and, therefore, reduction in cost.
2. Outsourcing or subcontracting all or part of the services under the following circumstances
- Service is not critical.
- The current level of productivity and efficiency of the internal service organization
is not commensurate within industry standards, benchmarks, and performance.
3. A joint venture with or divestiture to another service vendor currently in or is considering the outsourcing market. The objective of this strategy is to:
- create a larger organization with immediate economies of scale
- create a framework to significantly increase the portfolio of services
- reduce the price to the company’s own end-user constituency.
In substance, the process of reducing costs and improving efficiency can be achieved through a variety of ways, including outsourcing, downsizing, or growth, and can be implemented through a number of different mechanisms.
The Description of the Actual Outsourcing Decision Process
To outsource or not to outsource that is the question. This is definitely the question on the minds of almost everyone, from Chief Executive Officer to entry-level employee. Outsourcing has a number of real and perceived benefits, as well as disadvantages.
While outsourcing seems to be an activity that just about everyone is doing, few organizations who consider it really know exactly what it is, or how to do it effectively. Likewise, vendors who have read the "writing on the wall" that the outsourcing market is large and growing, desire to take advantage of these opportunities, but are not quite sure exactly how to do it.
The most common perception of outsourcing is that it is a process of contracting with an outside party to handle a portion of a client's business. Some people view outsourcing as nothing more than hiring a series of outside specialists or service groups to replace full-time management and personnel.
The concept of outsourcing in information technology is now at least three decades old. What appears to be a new is that outsourcing is gaining ground in such areas as clerical functions, delivery services, and back room operations.
A. OUTSOURCING BENEFITS AND DISADVANTAGES
The general conventional wisdom of many companies is to provide as many functions, tasks, and activities as possible through internal personnel. The rationale behind this mode of thinking is that internal operations, particularly through centralized management, can provide the greatest amount of management control over efficiency and productivity. However, new competitive pressures and a troubled world economy have forced a number of organizations to re-think their strategies of building up internal organizations.
According to management guru, Peter Drucker, in-house service and support activities are defective monopolies, which have little incentive to improve their productivity. For example, in-house staff may respond to a service problem by hiring more people or an outsource vendor, or respond by insuring that customers get what they need without extra high costs.
The most obvious reason (Figure 1) behind outsourcing is that it provides very effective means of reducing costs by contracting with a third party who can provide better service and high quality at a lower cost. By reducing costs through outsourcing, you gain the ability to improve operating efficiency, increase return on assets, and improve profitability.
FIGURE 1
REASONS WHY COMPANIES OUTSOURCE
|
Rationale
|
Description
|
Benefits
|
Cost
Reduction |
Outsourcing to a Third Party
to Reduce Cost of Operations |
- Improve Efficiency
- Increase Return On Assets
- Improve Profitability
|
| Revenue Generation |
Contracting with a Third Party
to Provide Products or Services
that the Contracting Firm
Cannot Offer on Its Own |
- Reduce Risk
- Improve Efficiency
- Increase Revenue
|
Hybrid
Situations |
Collaborations, Alliances, Partnerships,
Etc., with Two or More Like Parties
in the Same Business Line to Offer Complimentary Products or Services |
- Investment
- Increase Capability Utilization
- Create Economics Of Scale
|
Outsourcing is also an effective means of generating new revenues. For example, the firm that outsources can contract with a third party to provide products and services that it cannot offer on a profitable basis. This form of outsourcing enables a firm to test market demand for a service or product in a less risky, more cost-effective way than creating the service internally with scarce resources.
Outsourcing can also occur in the form of collaborations or alliances with two or more like parties in the same business line to offer complimentary products or services. These hybrid situations enable the two organizations supporting the same market to share resources and increase revenue through synergistic relationships. Benefits of these hybrid situations also include the ability to:
- increase capacity utilization
- improve return on investment
- create economies of scale.
Takeaway
Outsourcing can create a number of economic advantages:
- eliminating investments of fixed infrastructure
- allowing for greater quality and efficiency of services
- cost savings
In addition to hard dollar benefits, in both the long-and short-term, outsourcing provides soft benefits such as increased access to functional expertise and freeing up management time to focus on the priorities of a strategic nature.
Related Information
Field Service Outsourcing
Aftermarket Service as a profit center-Part IV: Technology is Key
Aftermarket Service as a profit center-Part III: The Cost of Revenue
Reverse Logistics industry insights and directions from recent industry events.
The first quarter of 2012 has been a whirlwind for me. I was fortunate to participate in and deliver presentations at several key Aftermarket Service and Reverse Logistics industry conferences:
- Reverse Logistics Association Conference & Exhibition Las Vegas 2012
- CompTIA – IT Service & Support Winter Conference
- Service Industry Executive Summit
In fact, I have a new mantra …”Every day in every way I am finding new ways to add value to the industry”
In keeping with my affirmation to grow professionally and contribute to our industry, I thought I would share some of the insights that I learned at industry conferences over the last three months:
1. Cloud, Business Intelligence, & Mobility trend are having a significant impact on the IT industry. These trends are providing service providers with better tools and technology for delivering service on a highly productive & efficient basis. At the same time, this technology is changing the complexity and landscape of the service environment in terms of what is technology, is service and how it is serviced. On the other hand, these challenges create new revenue generating opportunities for new and innovative services.
2. Increased interest in acquisition - Arrow and Avnet, two of the world’s largest wholesale distributors of components and equipment have entered the Reverse Logistics & Aftermarket Services Market through acquisitive strategies; Waste Management as well. Announcement of their transactions has triggered many companies to evaluate their growth strategies. Companies are now acknowledging that size is a key success factor. Not only are other large companies like Jabil and others pursuing acquisitive growth strategies, so are a number of many middle market companies. At the same time, many small & medium size companies are considering to merging or selling their businesses to larger companies in order to gain access to a larger market share and revenue opportunities.
3. Strategic initiatives to deploy Service Lifecycle Management (SLM) Systems - Advances in cloud computing combined with the recognition that SLM is critical to building a profitable, predictable, and sustainable business has led many Service providers to undertake new initiatives to purchase and deploy new technology. There are growing numbers of vendors who offer best in class solutions to the market. As such, companies looking to deploy new solutions can ensure optimal results by taking a structured and disciplined approach to selecting software vendors. Knowledge of the available state of the art and development of detailed functional specification is fundamental to the evaluation process.
4. Expansion into new markets & services - More and more companies realize that revenue growth is dependent on the ability to expand into new markets and services. As such, we see a number of companies who are have found profitable growth opportunities by either expanding their service portfolios or expanding into new technology segments. For example, asset recovery companies who have developed depot repair capabilities and vice versa; or companies who repair computers that have now expand into consumer electronics and cell phones.
5. Greater focus on marketing & thought leadership - Revenue growth, regardless if it is through market expansion or market penetration, requires an effective marketing strategy. Those companies that have been successful in generating new business have been those who can effectively articulate how they add value and use thought leadership-marketing strategies to pull customer toward them.
Key Takeaway -these are exciting times for companies involved in Aftermarket Service & Reverse Logistics. There is more opportunity than ever before within this industry. To capitalize on these opportunities, it is important to have an effective road map. A management consultant with decades of experience and access to comprehensive business intelligence on the industry can also facilitate successful outcomes. Please feel free to contact us for more information.
Related Information
Reverse Logistics Market Size & Forecast
How to Increase Services Revenue
How to Reduce Aftermarket Services Cost
How To Increase Services Profits
Aftermarket services revenue can boost profits and increase customer satisfaction and loyalty.
Market forces that increase their costs are always squeezing OEMs. Raw materials, fuel, supplies and shipping are big expense items. At times, companies are reluctant to pass these costs on as they fear customers will look for alternative sources of their products.
Often overlooked by smaller OEMs, is the profitable aftermarket services they can provide. Some of these are offered as free services and others may be new services for an OEM to offer. However, aftermarket services revenue can help boost profits.
End users are keeping equipment in use longer. While this presents a problem for OEMs when it comes to selling new equipment it also creates opportunity by providing additional services after equipment is sold.
Before undertaking a shift to selling services in the aftermarket arena, it is necessary to do research on your existing installed base. The following questions need answers:
- What equipment will you service?
- Where is it located?
- Who is the owner?
- How many units are in the installed base?
- Who will be the customer?
- What is the quantity of customers?
- Where are the customers located?
- How many of the installed base will buy our service and how many installed units do they have?
After the above questions, an OEM can determine if it makes sense to offer maintenance and repair services directly to their customers. An analysis of existing customers must be undertaken. If there are thousands and thousands of units installed and working, then it may be sufficient to perform a sampling survey.
Companies with little experience in aftermarket services ought to consider the services of a consulting firm that specializes in the High Technology Service Industry. They can provide expertise in determining which services to offer and how best to provide them. Many times outsourcing these services makes the most sense and provides the highest profit. An aftermarket services consultant can advise you on contracting with a 3rd party outsourced company to provide the aftermarket services that you want to provide.
1. Service contracts: Offer service contracts to your customers. Who can provide better maintenance of a piece of capital equipment than the company who manufactured it? Your existing company base is a very valuable asset to market this service to. It makes sense to most people that manufacturers can best service the equipment they manufacture. If as a manufacturer you do not have an outside service department, explore outsourcing. It will be cheaper for you to provide "factory authorized" service by outsourcing. Periodic service will keep your customers confident in their selection and they will come back when they are ready to buy again.
2. Repair service: Many smaller manufacturing companies do not provide factory service unless an item is returned to the company. For large items, this may be impossible and for all equipment, it is an inconvenience. Here again your existing customer base is a built in market for paid on-site service. Even a single site manufacturer can provide on-site service by outsourcing. If your call center handles the service call by getting the appropriate information, and then dispatches the outsourced repair company, you have an opportunity to make a great impression and keep your client base happy.
3. Outsource installation: Often, companies do not provide installation services. However, if you make this one of your aftermarket services and use a company that you outsource to as the installer, writing installation into the sales contract is easy.
4. Waste disposal: When you get your oil changed in your car there is usually a fee for disposal of your old oil. You generally do not even have a choice, either pay it or take your old oil home! Today, manufacturing companies are trying to comply with environmental laws and build a good community reputation. Selling a piece of equipment or as a replacement charge a disposal and recycling fee. Of course, this is part of the sales contract but is actually one of the aftermarket services that will help build your aftermarket services revenue. This is an easily outsourced way to make more profit.
Takeaway
As your organization evolves greater sophistication in aftermarket service, your company can provide other services. Today IBM makes more money from its global services (aftermarket) then it does from sales of hardware and software combined.
Related Information
Aftermarket Services as a Profit Center Part II
How to Reduce Aftermarket Services Cost
Service Mobility for Efficient Aftermarket Services
You can find cost savings and hidden profits in aftermarket services if you know where to look.
Many people may see this opportunity as solely involving parts inspection, repair or replacement. These same people most likely will benefit from a top-to-bottom review of aftermarket services. There are opportunities for cost reduction, just in the warranty service segment of aftermarket services, assuming the decision is to keep the service in-house.
Incoming logistics: no matter how the defective part arrives, there is a cost associated with it if the OEM is paying for it. To control costs for warranty returns, OEMs should…
1. Only accept warranty returns shipped by your contracted shipper and that have a Returned Merchandise Authorization number.
2. Rather than have a call center person assign RMA numbers, explore having a technical support person on the phone or via online chat. Parts returned may be in perfect working order but as the equipment is new, a minor install glitch or explanation of how the part functions maybe the actual problem. Solving the problem before a part returns results in several significant cost savings.
- no in-bound shipping or handling costs
- no labor costs expended inspecting a perfectly good part
- no out-bound shipping expense
Of additional consideration is the aspect of customer satisfaction associated with restoring equipment to service without a part exchange or a service call.
Nevertheless, aftermarket services are often not the strategic competency of most OEMs. In fact, aftermarket services are a different industry entirely. For this reason considering the outsourcing the entire function should not be overlooked - this means forming a partnership with a company that does all warranty repair for you. This includes:
- in and out-bound shipping
- repair or replace decision-making
- intense, warm and empathetic customer relations to attempt a resolution without a part or total piece being returned
Ideally, an OEM’s outsourced warranty service provider will have facilities strategically placed throughout the country to keep shipping costs low and turn-around time rapid.
Warranty returns and repairs are part of the old paradigm for aftermarket services that viewed aftermarket contact with customers as a necessary business expense. Smart organizations are viewing these same services today as a source of revenue.
A lucrative aspect of the aftermarket services is maintenance. Once again, this is ideal for outsourcing to a company that does maintenance work as a core competency. To keep warranties in effect, sell maintenance plans at the time of initial sale. Your contracted maintenance provider should have strategic country-wide locations to service your clients from, a stock pile of parts so that service is usually a single call to the customer and be kept up-to-date by the factory to make sure they know of equipment changes and/or known issues.
Extended warranties make for great upgrades at the time of purchase. The purchaser pays the company up-front for services that are not rendered until a future time. Using the same outsourcing techniques and completing the warranty transfer at the time of sale, gives the manufacturer more money. By paying the outsourced warranty, expense with today's dollars by contracting the work out, the time value and opportunity cost of money benefits the manufacturer.
Product installation is often included in sales price, but most folks consider it an aftermarket service. It makes perfect sense for the manufacturer to engage the same company that will do its contract maintenance and field service to perform installations. This creates a relationship between buyer and service provider from the start.
Disposal and recycling of parts and total product has become an important of the reverse logistics chain and aftermarket services. Manufacturers have to be aware of regulatory changes in their own industries, complying with those is hard enough. Environmental regulations regarding disposal and recycling is an extraordinary challenge, if it is not your core business. This function to be outsourced to a company that can do it for less and whom will assume all risk for non-compliance.
Aftermarket services are an increasing source of revenue for OEMs. Paradoxically, OEMs who outsource aftermarket activities can reduce the cost of providing services and increase profits too. Services that are excellent candidates for outsourcing include:
- Warranty repairs and replacements
- Extended warranties
- Installations
- Service contracts
- Disposal and recycling
Takeaway
Many companies find it useful to engage consulting firms who have expertise in creating a strategy for maximizing returns on aftermarket service by creating tactics that reduce costs and improve customer satisfaction. A key component is any company’s drive to excel, is to look at aftermarket services as more than a cost of doing business but also as an opportunity to profit from.
Related Information
Service Lifecycle Management: What's a Lifecycle Worth?
Service Lifecycle Management: Benchmark Findings
2012 Opportunities In Aftermarket Services
Astute aftermarket services firms are quickly finding new profit opportunities that come after the sale.
Businesses are seeing pressure on their profit margins and customer loyalty remains difficult to maintain. Manufacturers of high-tech equipment are especially prone to volatility with their end-users.
Whether its computers, cars, or high-efficiency heating and air conditioning units, the first company with the newest technology has an advantage in getting new customers. The actions of consumers then puts a strain on companies with a large installed base, but no products near release, Wisely, these manufacturers have turned to aftermarket services to provide additional profit and maintain customer loyalty by establishing an extended relationship with the customer.
Aftermarket services goes by many other names including, After Sales Services, Post Sales Service/Support, Product Support, and Service Life-cycle Management. It does not matter what a company calls it, Deloitte completed a study back in 2007 that showed at that time the aftermarket services profit was as much as 75 percent greater than the profit from manufacturing, even if one were to include selling repair and maintenance as well as parts and accessories.
What Comprises This Profit?
With ongoing and speedy technology advances along with rapid deployment of new and more complicated products there is increasing demand from buyers for numerous additional services such as installation, maintenance, repair, extended warranties and consumables. One estimate pegs expenitures for consumables at five to 20 times greater than the equipment purchase price.
Astute manufacturers are quickly moving to take part in profit opportunities that come after the sale. However, others are missing out be not paying attention to basics. These manufacturers are tolerant of the high costs created by requisite after sale functions such as:
1. Recall
2. Disposition
3. Returns management
They do not have the vision to see that the reverse supply chain need not be an expense, but a way to create new profits by value recovery and profit creation. Those manufacturers who do not challenge the ordinarily costly expenses found in reverse product flow are failing to take money off the table.
Inefficient Reverse Logistics
Without a strategic view of the supply chain, dealing with the flow of products coming back as returns, repairs or recalls are some of the most costly processes found in the after sale supply. Companies usually regard these costs as part of the routine cost of doing business. This is shortsighted.
The Reverse Logistics Council of The USA has found that:
- up to 15 percent of manufacturers expenses are spent on reverse supply chain activities
- inefficient reverse supply chain management can further increase the cost
- a manufacturer's profit can be affected by up to about thirty percent
Reverse supply chain costs can be managed better of that there is no doubt. In the past few years, aggressive efforts to transform forward supply succeeded by supporting new service tactics and taking advantage of new contingencies. One example, postpone and build to order. The same imaginative solutions could squeeze the costs of rebound product supply chains.
Planning strategically for reverse supply chain logistics can…
- make the processes run more smoothly
- result in higher profits without higher costs
All at once, service response time is improved, customer satisfaction increases and brand loyalty soars - all things that stimulate returning and new customers.
Failure to Recover Value in Excess Reverse Assets
With growing demand for aftermarket services, the value and volume of products and parts found in the reverse supply chain increase proportionally and threaten the value of capital assets. These assets can be in the form of:
- Unwanted product by customers
- Returned/repaired inventory
Sadly, the great majority of items in the reverse supply chain go un-recovered despite having significant value.
Smart manufacturers will monetize parts of aftermarket services such as product disposal previously just absorbed by the company. Customers will pay for installation fees and maintenance contracts, not as part of the initial sale, but by aftermarket specialists who will tailor programs, including reverse logistics and upgrades, into aftermarket service packages.
Takeaway
The key to keeping your customers happy is exemplary aftermarket service. Companies that are operating at top efficiency recognize the key role that reverse logistics plays in aftermarket services and will streamline, enhance and profit from them.
Related Information
Whitepaper: What is a Lifecycle Worth?
Whitepaper: Service Lifecycle Management: Benchmark Findings
How To Improve Your Reverse Logistics Service
Does your reverse logistics service enhance customer satisfaction, build loyalty and boast profits?
Returns cost businesses billions of dollars every year. Moreover, return policies and experience significantly affect customers’ future purchasing choices across all industries. Given the exponential increase in online consumer conversations about customer service – good or poor – it is more important than ever to ensure your reverse logistics services support customer satisfaction and loyalty.
All types of companies can benefit from increasing the efficiency of their reverse logistics processes, not just to boost customer satisfaction but also to reap cost savings, stand out from the competition and meet increasingly stringent environmental protection standards.
3 Ways to Improve Your Reverse Logistics Service
1. Integrate and streamline.
Establish a single company-wide reverse logistics center to capture functional and overhead efficiencies.
Speed up the process to get products back into the “for sale” side of the equation. This reduces or eliminates waste due to product usability problems or obsolescence.
Integrate advanced technology wherever possible. Using pre-printed shipping labels that contain detailed customer and product information makes it easier and faster for customers to return items and facilitates quicker, personalized customer notification of return receipt and disposition.
Implementing online Return Merchandise Authorization (RMA) lets customers themselves alert you they are returning items and why. Advance information about incoming returns allows warehouse efficiencies such as eliminating the need for sorting and better labor scheduling.
Continuously look for opportunities to improve every step of your system, especially the triage process. Increasing the percentage of aftermarket services options that enable you to retain or create sales minimizes your need to use the worst-case option, disposal. Even tiny details can make a big difference – one company incorporates a sensor that can indicate feasibility of repair or refurbishment if products are returned.
2. Track and analyze.
Understanding the total cost of your supply chain requires detailed knowledge about the reverse logistics portion. Better visibility into your system can identify opportunities to make aftermarket services more effective -- finding and solving problems earlier, improving customer satisfaction, and uncovering new ways to increase revenue.
Capture and track detailed information every step of the way, and carefully analyze that data. Evaluating individual customer accounts can help you reduce financial exposure when downstream distributors or retailers return unsold goods.
More and better feedback helps improve quality of products as well as service. It can also help you identify and perform repairs for resale. Ultimately, reducing reasons for returns lowers your return volume, a substantial cost savings. Some companies have even turned their reverse logistics center into a profit center.
3. Consider outsourcing.
For many companies, contracting with a Third Party Logistics (3PL) firm accelerates and enhances processes all along the reverse logistics chain. Outsourcing can provide customized aftermarket services for specialty industry sectors. Often, 3PL companies are better able to dispose of materials in compliance with existing environmental protection and sustainability regulations.
However, outsourcing is not always the best alternative. It is important to weigh the benefits versus working in tandem with your existing supply chain partners to devise and execute your own unique reverse logistics system.
Whether you choose outsourcing or retain product reverse lifecycle management in-house, a carefully designed and implemented system can establish your company’s reputation as a leader in sustainable supply chain management and enable you to realize cost savings, enhanced customer loyalty and perhaps even the potential to generate revenue from aftermarket services.
Takeaway
Reverse logistics is a necessary component of doing business, and the cost can be substantial. However, it does not have to be unavoidable. By improving efficiencies in your product lifecycle management, you can turn this “back end” of your supply chain into a profitable, marketing and environmental sustainability asset.
Related Information
Reverse Logistics Market Size & Forecast
Field Service Optimization: Oxymoron Or Major Opportunity
10 Ways to Maximize Reverse Logistics Software ROI
Are you ready for Reverse Logistics 3.0?