Manufacturers of industrial equipment, components, and instruments have, on average, a service revenue share of 30%, which has been stable over the last two years. This has been shown by the results of TSIA's Industrial 30 index, which analyzes the quarterly reports of 30 industrial manufacturers reporting their service revenues.
We’ve found that the service revenue share was stable during five quarters of revenue growth, and it is still stable after two quarters of shrinking revenues of 7%, as compared to last year. This shows that a huge part of services in industrial equipment are product-attached. Fewer product sales mean fewer implementations, lower product utilization by customers means fewer repairs, and customers under pressure even reduces support levels. Some services, like calibration or mission-critical support, are stable.
Learning from Industry Pacesetters
When we look at hardware and equipment manufacturers benchmarking their field services, for product-driven companies (product revenues >50%) we see a slightly lower service share than in the Industrial 30 Index. TSIA benchmarking data shows the breakdown of service revenues, as seen in the figure below.
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Source: Vele Galovski - TSIA FS Benchmark 2015.
What is amazing is that revenue pacesetters, the top 15% by revenue growth, are showing revenue share twice as high, at 48%. This leads to the questions, “What are they doing different?” and “What makes them able to grow their overall revenues at a higher pace?”
The drivers are the support and maintenance revenues, including field services and parts, that are growing at triple the rate compared to the companies in the product engine peer group. These revenue pacesetters:
- Understand services as the engine of corporate growth. The common practice is to have services as a profit center.
- Outsource less. They understand services as a core competence.
- More than likely have a dedicated maintenance sales team.
- Have higher indirect costs, such as costs for sales, marketing, and training. The amount of employees managed by one manager is also lower.
- Are focused more on their own technology, and the amount of offers is lower.
- Have a service margin that is 10% higher than the product engine peer group.
What This Means for Industrial Equipment
The lessons learned are that industrial equipment (IE) organizations are very much aligned to product-attached services. (Tweet this!) As product revenues fluctuate, it creates problems for the whole organization. To get more independent from economic cycles, services needs to focus on efficiency and optimizing customers’ processes and outcomes.
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The TSIA Remote Services Continuum.
Through the industrial internet, manufacturers need to move along the Remote Service Continuum. This is why developing new service offers that provide real business outcomes to their customers is the top services business challenge for manufacturers of industrial equipment.
To drive revenues we recommend:
- Leverage and monetize remote services and analytics. This helps increase service efficiency by reducing truck rolls and increasing first-time-fix rate.
- Unlock the potential of premium support offerings and contracts. The biggest lever is to attach premium support contracts to the product deal.
- Create adoption and outcome offers. Understanding customers’ primary goals and desired outcomes allows for the ability to offer higher-level services, like operational (managed) services, or services with guaranteed outcomes. (Tweet this!) TSIA’s emerging offering surveys are showing successful practices in including adoption services in the premium/support offerings to increase the perceived value from the customer’s perspective. To create outcome offers, outcome engineering is the starting point.
As always, feel free to reach out with questions either in the comments section of this blog. Thanks for reading!