- B2B standard or customized agreement bundled as a
- portfolio of services engaged in the
- maintenance management of
- specified-machines for a
- defined-period at a
- fixed-fee with
- commercial buyer will be committed to a 3-year agreement at
- $1,000/month fixed-fee in which the
- seller will manage a portfolio of services engaged in the
- maintenance management of
- 3 specified-machine units located in San Diego
- Two of the services within the portfolio are:
- Supplying all technicians, parts and tools employed in the correct-failure (e.g. break/fix) unplanned maintenance process, but the buyer will be overseeing the process. There is an entitlement-assurance that the resources will be on-site within 2-hours of a buyer’s request, within any 24/7 period.
- Supplying technicians and tools employed in the annual inspection planned maintenance process, as well as overseeing the process. There is an entitlement-assurance that the resources will be on-site within a 2-week window of the planned event and that the process will be completed within 4 hours during a period other than 0700-1600 from Monday to Friday.
Extended-Services are not only applied to the top level of a Bill Of Material [BOM], a machine model, but as well as for lower levels (e.g. subsystems, components). Note that the parts suppliers of an Original Equipment Manufacturer [OEM] often have developed their own Extended-Services solutions independent of the OEM or the OEM’s distribution channels. For this post, all Extended-Services will be referred as applying to the top BOM level of machines, though they will as well often be applicable to lower level BOMs.
The sale of the Extended-Service is “attached” to the transaction supplying a specified-machine to the buyer (e.g. machine sale, lease, & sharing). The limited manufacturer’s warranty is bundled into the Extended-Service.
- Warranty-In-Effect Conversion
An Extended-Service is offered to an enterprise without an Extended-Service agreement attached, but with specified-machines under a limited warranty that has yet to expire. The remaining life of the limited warranty is bundled with the Extended-Service.
- Warranty-Expiring Conversion
An Extended-Service is offered to an enterprise for specified-machines without an Extended-Service agreement attached; machines are under a limited warranty that is expiring.
- Warranty-Expired Conversion
An Extended-Service is offered to an enterprise for specified-machines without an Extended-Service agreement attached; machines are under a limited warranty that has expired.
Extended-Service revision in which deliverables have been expanded.
Extended-Service revision in which deliverables have been reduced.
Extended-Service revision in which an expansion of specified-machines has occurred.
Extended-Service agreement expiring in which a new agreement is developed for the specified-machines covered by the previous contract; up/down-selling and or cross-selling may occur as part of the renewal solution.
Recently, Blumberg Advisory Group and Giuntini & Company performed an in-depth global survey of the configuration and marketing of Extended-Services agreements, with a primary focus upon the B2B marketplace.
- 36.5% of the machines supplied by an enterprise are attached with an Extended-Service agreement.
- 19.9% of Extended-Services sales occurred after the attachment period; when a limited warranty was either still in effect, expiring or expired.
- 56.5% of machines supplied were covered by an Extended-Service sometime during their lifetime.
- 72.4% of expiring Extended-Service agreements were renewed
- 59.6% of existing Extended-Service agreements were revised as a result of an up-sell, down-sell or cross-sell.
- Majority of the sellers of Extended-Services anticipate higher sales over the next two years as a result of intensely targeting renewal rates and configuring more customized solutions.
- Note that some of the statistics above would need to be modified if the Extended-Services seller also engaged in cross-selling specified-machines that they did not supply to the buyer.
It is my belief that an enterprise should strive for at least a 75% of the specified-machines they have supplied being engaged in an Extended-Service agreement throughout the lifetime of the machine; the caveat is that to reach such levels there are many strategic and tactical issues that the seller of Expended-Services must address.
- Recurring Revenues
Provides a significant repeatable source of cash flow; a hallmark for investors to favorable assess the financial stability and in turn market value of an enterprise.
Provides a level of profit margins that are higher than that of the transaction supplying the machine; again attractive to investors.
Creates a long-term relationship between the seller and buyer. Increases the “stickiness” of the relationship that enables greater opportunities to sell a stream of Extended-Services throughout a machine’s lifetime.
- Production Learning Curve Mitigation
Provides the recurring revenue positive cash flow to support the production losses of machines in their early production life cycle stage due to the “production learning curve.”
- Data Collection
Provides a stream of valuable detailed information acquired from the seller’s service operations; design flaws employed by design, poor parts quality from suppliers for purchasing, poor quality of assembly for production and more.
- Operating Expense [OpEx] assurance
Expenditures incurred in machine maintenance processes defined in the agreement are fixed. Note that “supplemental” charges, incurred as a result of activities performed that are outside of the activities defined in the agreement, can often become a point of contention between the buyer and seller.
- Investment reduction
Direct investment in parts, and indirect investment in facilities, tooling, test equipment and more involved in managing maintenance processes are often materially reduced.
- Machine employability increase
Incentive of seller, through entitlements related to machine uptime/availability, to achieve high levels of employability through robust management of maintenance processes.
- Regulatory compliance assurance
Seller’s Body Of Knowledge [BOK] regarding federal, state and local regulations is often more comprehensive than that of the buyer; avoids potential fines for buyer.
- Adjusted machine asset value increase
Seller’s records management of work performed and entitlements to manage adjusted machine values can decrease depreciation, and resulting in a favorable impact upon the income statement.