08 January 2009

Viewpoint : High Tech

View from 10,000ft

Published:: 04 November 2008
Article Type:: Viewpoint

We all spend our days immersed in our own industry, looking for ways of improving the way we do things from within. But what if there were lessons to be learnt from outside that could have a more dramatic impact on our business - and leapfrog the competition in the process?

Traditionally, high-tech companies would focus their efforts on improving product, leveraging its potential for differentiation. But such potential has been eroded by advances in technology and reduced manufacturing costs, commoditised products forcing even the leaders in this field to search for new means to claim the high ground.

This has led to an increased appreciation of the strategic value of service, as companies have moved towards offering their customers improved after-sales support as a means of differentiation. So far, this change has evolved from within the industry. But is there further untapped potential for complementary strategies that thought-leading companies can explore from an industry whose offering couldn't be more different, but whose challenges offer surprising commonalities? Can high-tech learn from aerospace and defence?

The A&D industry is witnessing a dramatic increase in PBL (performance-based logistics) contracts. These place the responsibility for performance back with the original supplier, who is no longer merely providing product, rather guaranteeing uptime over an agreed period of time. This means that any problems arising with a critical part such as an engine are no longer the concern of the customer: the supplier must repair or replace the item immediately or incur contractually agreed financial liabilities, which, in A&D, can easily run into hundreds of thousands of pounds. Suppliers can therefore no longer stand back and cash in on repairing their own products: they must be proactive in ensuring uptime, providing the right part at the right time with the right engineer before the problem even arises. Moreover, for the model to work they must price these contracts both competitively and profitably: a huge challenge in itself, when PBL contracts typically run for several years. They are asked to predict parts and labour availability and cost over the long-term… but is that not a reasonable price to pay for customer loyalty?

Let us now move out of the cockpit, and into the office. The copier is on the blink (again); there's a PC in finance that's always crashing, with the accounts due for filing next week; and that new projector, bought especially because a major prospect is due in this afternoon, seems to have a faulty bulb. Things always go wrong at the most critical junctures, don't they? Yet surely you've shelled out enough for this to be someone else's problem… if someone made it their problem, would you not consider becoming a customer of theirs? How much do you really care whether their copier is slightly faster or slower, or indeed slightly cheaper or more expensive? If they committed to having an engineer on site within two hours of your call to either fix or replace, and to be liable for the costs of it being out of operation, wouldn't that give you near-priceless peace of mind?

PBL contracts address a basic human desire and project it into the business world: the desire for a problem outside our comfort zone to be someone else's problem. Companies that satisfy that need stand to gain faithful, long-term customers: challenging as they are, the demands of meeting PBL obligations compare quite favourably with the costs of acquiring new customers and retaining their business. In October 2006's "The Service Parts Management Update Benchmark Report", the Aberdeen Group stated that, "profit margins for aftermarket service and parts range from 25 per cent to 1,000 per cent higher than margins for initial products". It is hard to imagine a more compelling argument to ensure customer relationships are strong, rather than fleeting.

High-tech companies must ensure they are equipped with the required tools. They need to empower their service division with leading-edge visibility and planning capability to successfully tackle, over numerous years, the perils of obsolescence, parts chaining and supersession that they already struggle with over a matter of months. With margins tighter than ever, positive ROI depends as much on reliable lifecycle planning as it does on innovative R&D and marketing. Companies require tools to plan their service parts requirements from product launch to withdrawal, as well as to optimise their service parts pricing strategy throughout that entire lifecycle. Improving pricing by just one per cent has a 7.8 per cent impact on gross profit - far more than an identical increase in sales (2.8 per cent) or reduction in cost of sales (4.9 per cent). This highlights that, while the potential of well-constructed PBL contracts is clear for all involved, suppliers cannot afford to either price themselves out of the market or make commitments they cannot honour - and therefore require proven solutions, capable of addressing both high-tech and A&D, to help them meet their new challenges. The PBL model A&D has mastered definitely holds valuable potential for high-tech companies to differentiate themselves on a basis that is not product.

As for enabling them to leapfrog the competition… if executed correctly, this is a strategy that might just enable smart players to jet all the way past it.

Kevin Tingey is vice president and general manager, Servigistics EMEA.

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