Creating & Leveraging Equity in Your Service Organization ©

ISA Management Division Newsletter, January, 2007

by

Roy Sequeira & Gary Patterson

Which would you prefer?

Your Service organization is a necessary but problematic drain on resources?
Or
Your Service organization provides a positive and healthy ROI

We have seen both situations and firmly believe you would prefer the positive equity building version. This capitalizes on total potential, and leverages all resources to capture the full effectiveness and productivity gains resulting from a properly positioned and structured service function. The good news is that getting started on this path or moving forward is easier than you may have thought.

There are seven steps to transform your service function into a more profitable resource that achieves your corporate objectives. You can implement these steps individually as your resources allow. Being mutually synergistic, they will give the best results when all are in place. You will be pleased to find steps already in place which provide better results as other steps are implemented.

1. Many companies commit the majority of their investment in a new product to the design and product manufacturing functions early in the product's life cycle. Drawing Service into planning and design as soon as possible helps you design maintainability into your products. (Maintainability, often known as repairability, is that property in a product that facilitates bringing a "failed" unit back into customer use as expeditiously as possible.) Designing maintainability into your products improves not only service effectiveness, but often improves ease-of-use as well, and makes them more attractive to potential customers; all of which result in increased sales.

   Often, unfortunately, Service is the last function brought on board during development. At this stage, any service problems are seen as "spoilers" that disrupt the smooth progress to product release. Because of time-to-market and cost considerations, service is over-ruled and we, once again, release a product with known "features" unless the problems are serious enough to derail the release schedule.

   This lapse in planning can be very expensive as last minute or post-release changes to product design cost many times more than they would have were they made before design finalization.

2. Extend management focus beyond the period when the product is on the price list and available for sale. Instead, focus on total Life Cycle Management (LCM) which covers the product from when it is merely a concept to when the last unit is removed from use by a customer. LCM has immediate benefits across the entire organization, particularly during the new product introduction process. However, benefits continue over the entire working life of the product. So, all functions profit:
   • Development benefits by knowing up front the needs of all constituencies. Reduced scope creep helps bring products in on schedule and often reduces or eliminates expensive design changes that have to be incorporated into products already in the field
   • Manufacturing can better plan and optimize its buying and scheduling, resulting in lower product cost
   • Service can maintain products through end-of-life with optimal resource use and at lower cost
   • Administrative functions have time to prepare their staff to ensure sales orders are recorded accurately, handed off to manufacturing, and delivered to customers as per their needs
   • Marketing and sales benefit because these positive changes enable better margins at better prices

   In short, LCM helps every single group participating across the organization.

3. How much is it worth to free middle and upper management from those "cat and dog" fights? Create newer budgeting and strategic decision support tools that look at business and product drivers including design, manufacturing, and service parameters, so that your staff understands how decisions affect profitability over the entire life cycle. A simple business model, that can be used over and over again, enables all functions to understand how decisions affect one another. Better up-front understanding often reduces internal bickering and dissension, allows rational decision making, and optimizes the corporate bottom line. Keeping Service out of this loop adversely affects every one else.
4. We continue to be amazed by how few companies accurately know their most profitable customers and business lines. Structuring cost, accounting, and control processes, to enable reporting each function's performance at customer and product levels, as well as at geographic and unit levels, gives a much-improved perspective. (If you think Development and Manufacturing wish they better understood some of the costs allocated for a particular product, Service often has an even fuzzier picture.) Service usually gets an aggregate number that lets management know how things are at the top level. This aggregation prevents service from focusing on areas where small improvements could result in greatly improved margin contributions. Until service level agreement (SLA) penalties become meaningful, resources often are not allocated to determine cost drivers.
5. Best practices companies use their service organizations as part of monitoring customer feedback. Recognize the fact that Service generally has more contact with and knowledge of your customer base than any other function, including sales or account management. Tap into this valuable resource. Service can provide invaluable insight about where the customer needs additional products - these may be upgrades, replacements, or additional products for increased capacity. Sales costs for existing customers are much lower than for other sales, further improving profit margins.
6. Give Service a role in the decision making process, including meetings with other vital functions like development, manufacturing, marketing, and sales. This allows the executive level to hear and understand Service and receive timely information on your customer base. Quite often, service reports to operations, sales, or marketing. This increased layer of reporting often results in vital service perspectives being lost or filtered through other criteria. The executive team thus loses a vital source of information, making it less knowledgeable of and sensitive to customer needs and perspectives.
7. Some service organizations feel like they illustrate "the mushroom syndrome" where they are "kept in the dark and fed manure." Physical availability and proximity matter. Positioning senior service and support personnel closer to the development organization encourages and enables the interchange of ideas between the organizations. This simple stratagem often improves product maintainability for no additional associated cost and improves product design and ease-of-use, as well. It also reduces schedule disruptions when a critical service need arises, since engineering staff can quickly collaborate with support staff in recreating failures and creating a work-around or permanent resolution.

Most of these options can be implemented with minimal capital to produce impressive and improved ROI. None should require major resource allocation and associated costs. All can be implemented using mainly internal resources, augmented at critical periods by knowledgeable consultants. The company's increased effectiveness in responding to customers more than compensates for the (usually minor) associated costs. Improved synergies between cooperating functions are easy to observe, but harder to quantify. Implementing several steps concurrently or on a coordinated basis often yields impressive results.

Although we understand such things would never happen at your company, here are two actual examples to illustrate the principles we have spoken of.

Does Product Development ever release a product before its time?

At an annual company-wide meeting, the VP of Product Development spoke with great pride of how his team had released a new top-end system on time and under budget. The applause that followed was deafening. The next speaker was the VP of Customer Service. Everyone present knew that Service had underperformed that year and wondered how the VP of Service would explain his abysmal performance.

After leading off with a number of initiatives that had been very productive and profitable, he went on to explain some of the major hits his function had taken. Topping the list was a charge for $6,500,000 for implementing 3 major Field Change Orders to fix the new top end system that had been released on schedule and under budget. He noted that if these charges had been allocated to Development instead of Service, Service would have been the top producing function within the company.

Having a solid reason for raising this issue caused a management policy review on service costs on new products. The company subsequently changed its accounting practice to allocate all field change orders within one year of product release back to Development. Although some will ask if accounting was asleep at the switch on this issue, a more appropriate conclusion is that this is what happens when Development has a seat at the table and Service does not.

Could doing the "logical" thing be bad for you?

On another occasion, Manufacturing, following good design practice of minimizing the number of separate parts, was adamantly opposed to adding 9 versions of a keyboard to a new terminal designed for international use. Service pointed out that the firmware supported nine languages, and international customers needed suitable keyboards. Manufacturing then negotiated with the supplier to add a package of all available keycaps so that customers could suitably modify keyboard layouts. By their standards, they assumed that changing keycaps was a "trivial" task.

Service requested six keyboards with their additional keycaps for testing the key-replacement process under realistic field conditions. Various senior executives and office personnel were asked to replace keycaps; every single attempt resulted in a broken keycap or a broken keyboard. This meant Service would have to train field engineers to replace keycaps and send a field engineer to customer site whenever a keyboard failed. Accepted business models forecast this would cost Service $4,900,000 over a five year period. It was pointed out that the cost of stocking sufficient numbers of 9 versions of keyboards for 5 years was less than $200,000.

Needless to say, the company opted for stocking 9 versions of the keyboard.

Those with a financial background will say this is why any functional area can benefit from understanding the basics of accounting. Problems that might appear unimportant to one group might have a devastating impact on another.

Your comments and questions about areas you would like us to explore, or that you would like clarified, expanded, rebutted … will help us tailor future articles to best meet your needs.

And, yes, truth is stranger than fiction – you really can not make these stories up.

From the Service and Finance Duo:

Roy Sequeira, President of Sequeira Consulting, creates the right combination of analysis, tools, and process to improve the effectiveness and profitability of organizations.
You may reach him at 508-510-1302 or www.sequeiraconsulting.com