For several decades, economists have observed that Service businesses are playing an important role in fueling the economy. In fact, Services as a percentage of the US GDP has grown dramatically. As of 2015, the service sector employed approximately 90% of US workers and accounted for 78.9% of the US Gross Domestic Product (GDP).
Nowhere is the service trend stronger than in the High Tech Industry. Most people outside of this industry do not think of services when they think of manufacturing and distribution of high tech products. However, companies engaged in these activities are generating a significant portion of their total revenues from the provision of service and support of high technology equipment and systems.
In general, consumers require a broad array services and support on the products they purchase to ensure these products work effectively. For example, design & engineering, installation, integration, technical support, and break fix services. Consumers are also increasingly interested in purchasing value-added services such a predictive maintenance, analytics, and optimization which extend the life of the product, minimize downtime and disruption to their operations, and ensure better outcomes or yields for their business.
As a result of these requirements, High Tech companies have found that services can generate 10 to 20 times more value (i.e., revenue) over the life-cycle of the product than the actual purchase of the product itself. This is compelling reason why many companies have developed services offering and adopted a services mind-set. Other reasons include:
- Contribution to Corporate Revenue Profits: Services can account for as much as 30% to 40% of revenue and contribute upwards of 50% of more to the bottom line among best in class OEMs and Resellers. As such, some companies remain profitable simply because of the financial contribution from their service business.
- Customer Requirements: Increasingly customers require a broad array of service and support on the equipment they purchase. Furthermore, customers expect and are willing to pay for additional support. In some markets, a company’s service offering can represent a competitive advantage and in others, its table stakes.
- Recurring Revenue Stream: Service & support provides companies with access to a recurring revenue stream for as long as their customers own and operate the equipment. This also enables companies to establish subscription based revenue offerings through the provision of service contracts.
- Sustainable Business Model : Product service businesses offer protection against economic downturns. Customers still need services to keep their equipment up and running during a recession. More importantly, services can generate a profitable revenue stream independent of the sale of products. Some companies, particularly those with very mature product lines, often turn to services as a strategy for subsidizing their core product business. Others, having realized that service can be more profitable then products, have exited their product businesses entirely, in favor of building and growing their service business.
- Builds loyalty and customer satisfaction: The provision of a broad portfolio of basic and value added services offers a way for companies to build brand loyalty and customer satisfaction. Indeed, service business ensure this outcome by providing ongoing support to the customer and through their commitment to optimizing the customer experience.
Increasingly, product manufacturers are recognizing the strategic role and value of service to their business. As a result, they expanding their service force to include “Anything as a Service” (XaaS) business models. These business models have not built overnight. They are often the last step of a business transformation journey known as the “Servitization”. The first step is making the commitment to managing services as a profit center. Therefore, it is strategic imperative that companies adopt a services mindset and provide service offerings if they are going to survive in the future.