Part one of a two-part series

Services as a Growth Driver for Manufacturers: The Aftermarket Is No Longer an Afterthought
Traditional product manufacturing companies are discovering that services are the next frontier for competitive advantage and that by focusing on new service capabilities, informed by the SMAC Stack, they can cultivate innovation and growth.

Executive Summary
Despite slow but steady global economic improvements, manufacturers face ever-increasing challenges in achieving yearon-year growth with traditional product portfolios. To cope, they are focusing their attention on establishing new and enhanced service capabilities to better leverage aftermarket services to stimulate growth. Many of these companies are exploring new ways to strengthen their service models, such as investing in IT to improve their delivery capabilities and diversifying their portfolios to increase revenue and market share. Well-executed strategies that focus on aftermarket services have shown solid results, but this approach is not without formidable challenges, both from within and outside the organization. The first installment in this two-part white paper series explores the key steps that we believe manufacturers should take to establish a competitive aftermarket service strategy. Advanced manufacturers are infusing their delivery of aftermarket services with new capabilities enabled by social, mobile, analytics and cloud technologies (the SMAC Stack™) and developing diversified service strategies that ignite topline growth. In Part 2, we will examine in more depth the challenges and benefits of establishing strong aftermarket services, concluding with actionable insights and starting points for manufacturers.

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A Challenging Environment for Manufacturers
Leading manufacturers have embraced a gamut of technological and other innovations over the years. They have introduced new manufacturing techniques, improved product quality, maintained lean manufacturing operations, implemented process improvements, reduced operating costs, strengthened supply chains, outsourced product components and processes, and expanded to new markets to maintain — if not extend — their competitive positions. However, today’s mature manufacturing practices — and a resulting plateau in cost reduction — have made it increasingly difficult to sustain competitive advantage. The competition has proved to be a great leveler as businesses the world over are quick to adopt new technological advances, replicate innovative products and employ best practices to their advantage.

Traditional manufacturers see services such as remote diagnostics, energy efficiency improvements, advisory services and benchmarking services as the next frontier for battle.
Marked by wafer-thin margins and demand for continuous product differentiation, manufacturers are challenged as much to protect market share as they are to deliver consistent revenue growth. According to a 2013 IDC Manufacturing Insights survey, just 12% of capital equipment manufacturers expect a substantial increase in equipment sales revenue over the next three years. A further 30% expect some increase, with 30% predicting flat revenues and 27% forecasting a decrease. In Europe, the Middle East and Africa (EMEA), just 15% of respondents expect a substantial increase in equipment sales volume over the next three years, compared with 9% in North America.1 Given engrained pessimism, equipment sales manufacturers must look beyond their traditional product portfolios to increase their top lines. In fact, traditional manufacturers see services such as remote diagnostics, energy efficiency improvements, advisory services and benchmarking services as the next frontier for battle. Many are establishing new service capabilities and enhancing existing ones to leverage aftermarket services that create new business opportunities, boost customer loyalty and drive growth.

Service Excellence Comes to the Fore
Service excellence has emerged as one of the top business concerns worldwide (see Figure 1).2 Capital equipment manufacturers have reached a critical tipping point at which service levels and innovation will dominate revenues and be the key competitive differentiator. According to a report by the McKinsey Global Institute, the share of manufacturing sector revenue and employment associated with services is as high as 55%.3 Proponents of service excellence argue that it brings strategic and financial benefits to customers and providers, alike. However, when manufacturers perform at the highest levels of service sophistication — and combine that with a high level of product innovation — outcomes may suffer. One reason: Some manufacturers spread themselves too thin to achieve excellence on both ends, resulting in the so-called “service paradox.”4

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Top Business Concerns of Manufacturers Worldwide
80% 70% 60% 50% 40% 30% 20% 10% 0% Global North Nort th Ame America a EMEA Cash flow Service excellence Recruit, train and retain a skilled workforce

Source: IDC Manufacturing Insights, 2013 Figure 1

The results of this ongoing debate will likely become more clear over the coming decades. However, in the immediate future, organizations risk losing ground to the competition if they continue to view aftermarket services just as a peripheral source of supplemental revenue and fail to recognize the full potential of such services. Aftermarket services are seen as a strategic response to continuing market volatility on the demand side and the cyclical nature of new equipment demand.

Aftermarket Services Today: Key Strategies
For product manufacturers, the purpose of aftermarket services is to support the core product portfolio. Most are not set up to effectively execute an aftermarket services strategy. Every major facet of the organization — including operational structure, capital allocation, personnel, brand and services — is geared toward promoting the product portfolio and generating revenues from it. Traditional approaches have been somewhat successful, but many manufacturers are now concluding that they need a fresh methodology.

Rethinking the Service Model: Moving Away from Product Centricity
The traditional service model is reactive and product-centric in nature, with contact initiated by the customer when equipment requires parts or service. This approach represents a lost opportunity, especially for manufacturers with large installed bases, as it overlooks replacement equipment and service revenue streams. In new aftermarket strategies, manufacturers adopt a proactive approach to services. For example, one of our clients, a leading HVAC equipment maker, is moving beyond a focus on operator-level customer personnel and maintenance issues and is making a coordinated effort to engage the C-suite and directors, as well. The company is initiating contact and focusing on delivering a customer

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Quick Take
Aftermarket Service Strategies: Our Work with Clients
We are partnering with many of our manufacturing clients to help them create and execute new aftermarket service strategies. Examples of these initiatives include: ity and efficiency, and created field adoption tracking capabilities for new service strategies through analytics and metrics.

• Leveraging

aftermarket service as a growth driver through a variety of strategy and technology initiatives. shifting trends in aftermarket services.

• Harnessing

• Crafting new strategies and staying informed about the • Developing • Building
service lifecycle designs, reengineering business processes, designing customer onboarding processes and establishing service best practices. advanced enterprise systems comprised of social media and mobile platforms to support advanced service capabilities. This has enhanced customer engagement, improved internal service productiv-

real-time data to derive business intelligence and deliver customer-facing reports and notifications that enhance customer experience, significantly improving service renewal rates.

These initiatives have allowed our clients to not only build viable service organizations but also wrap services around their products and strike a balance in their portfolios. In some instances, our clients have decoupled services from products and established them as brands in their own right. Such changes in the execution strategy have enabled manufacturers to tap the potential of the vast aftermarket services market.

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experience that is consistent with its products. It is also pursuing an advisory role and educating customers about various service offerings and the impact of services on the customer’s capital and expense planning, lifecycle costs for asset operation, operator productivity and intangibles such as safety, sustainability and environmental quality.

Leveraging New Technology and Developing Predictive Capabilities
It is not a coincidence that aftermarket services are gaining prominence in the age of advanced information technology. Investments in IT and organizational capabilities have helped manufacturers build out their service strategies and execute on them effectively. A recent phenomenon is the increasing emphasis on predictive capabilities using components of the SMAC Stack. Manufacturers are leveraging these technologies to sift through vast troves of mobile and social data stored on the cloud to identify value propositions for their customers.

Manufacturers that have strengthened their capabilities through SMAC technologies are more proactive in addressing customer needs.
For example, we worked with the HVAC equipment manufacturer mentioned above to redefine its service delivery mechanisms and the customer experience provided by its field service personnel. The manufacturer developed a remote service management system comprising a customer service fulfillment center that allowed remote technicians to receive alerts generated by customer equipment under a premium service contract. The remote technician triages the alerts based on severity, connects to the customer’s network remotely, makes changes to the customer’s control system settings, runs diagnostics on equipment, resolves issues and closes the case. This entire service cycle uses the data analytics layer of the SMAC Stack. As a result of this work, our client can provide assistance to its customers remotely and can now resolve over 55% of reported service problems, thus reducing the cost of service visits by over 30%. When the company utilized a holistic SMAC solution, it achieved benefits on many fronts simultaneously. The manufacturer is able to collect high volumes of real-time equipment performance data and store it on the cloud without capacity constraints. It can detect early warnings of potential problems through predictive analytics and proactively send alerts to its customers’ mobile devices, advising them about ideal equipment use. This helped improve equipment life by 30% and reduce the number of problems reported by an additional 20% compared with a standalone data analytics solution. When necessary, the manufacturer is also able to leverage big data and mobility to proactively schedule technician visits for customers, identify potential causes for the problems based on the diagnostics codes detected remotely, and furnish an estimate of potential repair costs. The company was able to provide better intelligence to its service technicians, which improved technician productivity by 80%. It also engaged customers on Web portals and moderated interactive chat boards to provide information, answer questions and seek instant feedback at the push of a button provided in advisory messages. This reduced the time taken for action on customer feedback from over

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a month to less than three days due to the mobility-enabled reverse feedback loop established with the sales offices and smart devices used by service technicians. This capability contributed to an increase in average sales revenue per office from 15% to 28%. Combined, these improvements resulted in a dramatic increase in customer satisfaction ratings, from an average of less than 2 to over 6 on a scale of 1 to 7 (with 7 being the highest). This illustrates the power and multiplier effect of the integrated SMAC Stack compared with the benefits that would have materialized from individual SMAC elements. Manufacturers that have strengthened their capabilities through SMAC technologies are more proactive in addressing customer needs. For example, we helped a global diversified technology and industrial leader enhance service competitiveness through initiatives such as service response planning; service time and cost estimation; and customer relationship management.

Using smart services, manufacturers are delivering early-warning mechanisms, critical failure warnings and end-of-life advisories for equipment.
As part of this initiative, we designed a playbook for first response when alerts were generated based on historical performance indicators using data analytics. The playbook provided step-by-step directions for triage and issue resolution. It also provided a library of alert codes mapped to potential causes for standard problems based on an analysis of historical data stored on the cloud, which helped the technicians provide better-informed diagnoses to customers. Most importantly, the playbook provided a quick reference guide to calculate a high-level estimate of costs based on historical repair and labor cost data for certain commonly occurring error codes, which were communicated to the customer’s mobile devices. These initiatives helped promote transparency and build customer confidence in our client’s service capabilities.

Graduate to Delivering Smart Services: Adopting the SaaS Model
Building on predictive capabilities, many manufacturers have graduated to “smart services” in recent years. Smart services are those that raise the bar on predictive services and provide a preemptive capability.5 Such services enable manufacturers to not only address the symptoms of equipment failures but also prevent the causes of the problem well before an issue develops. Using smart services, manufacturers are delivering early-warning mechanisms, critical failure warnings and end-of-life advisories for equipment. Customers can begin to manage their assets efficiently and adopt a proactive approach toward maintenance, leading to reduced repair costs, less downtime during critical production cycles and the ability to plan mitigation strategies. Manufacturers are also gradually adopting the software as a service (SaaS) model to custom-build and/or deploy out-of-the-box software platforms that are capable of delivering smart services that did not previously exist in their service portfolios. In a mobile form, such services can be used both by field service personnel and customers to remotely manage assets in a self-serve model. This has allowed manufacturers to increase service revenues while decreasing customer contact and

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service execution costs using remote asset management, equipment monitoring and asset lifecycle management. For example, a leading manufacturer of commercial and residential building comfort systems and equipment was able to advise facility managers of a prominent hospital group to maintain temperature control and comfort levels in critical care areas and remotely assist them in adjusting the settings on their heating and cooling equipment. Overall, these developments helped the manufacturer reduce technician visits to customer sites by over 70% and reduce average in-warranty equipment repair costs by approximately 30%. In another example, a leading industrial equipment manufacturing client recently ventured into the energy management aftermarket services by leveraging a combination of smart meters and customer energy consumption data. The manufacturer’s customers were using third-party services to obtain these metrics. We advised this company to invest in integrating a third-party energy benchmarking platform with its service portfolio, which consisted of equipment performance assessments and advisory services, quarterly performance insights, on-demand insights and sustainability advisory services to create new energy service offerings that make use of the benchmarking data. This was an innovative shift for our client from its core competency. The company partnered with us to establish a service strategy that helps it attract new customers and deliver smart services to its customers.

Manufacturers that want to expand their service offerings recognize the value of redefining the customer experience they offer.
As a result, the company can now provide insights about future trends in energy consumption, potential costs and comparisons with established industry benchmarks. It helped a large real estate company with facilities across multiple locations establish benchmarking scores, track improvements and view peer comparisons on a quarterly basis. It was able to reduce average energy costs by over 25% and reduce greenhouse gas emissions by over 20% for three consecutive quarters, contributing to its bottom line and sustainability goals. We are now helping the company build a reporting tool and mobile platform to improve customer reports and outreach capabilities. Our client is able to apply these new capabilities toward delivering performance metrics based on energy cost, consumption and greenhouse gas emissions to its customers. Organic growth rates of manufacturers using smart services are in the double digits, according to a Harvard Business Review article.6 The leaders are establishing new performance benchmarks for their industries, deriving more than 50% of their revenues and 60% of their margin contributions from services as opposed to product sales.

Enhancing Customer Experience
Customer perception of a product or service and the experience of interacting with the manufacturer play a crucial role in the purchase decision. Customer experience, in fact, is the cornerstone of most service providers in traditional service-oriented industries such as retail and hospitality. Manufacturers that want to expand their service offerings recognize the value of redefining the customer experience they offer. As a result, business intelligence-powered preemptive services are important, but the manner in which these services are presented and delivered is equally as important.
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Manufacturers are adopting social media and mobility platforms to enhance both the format and mode of delivery. Personalized product performance information in the form of high-quality reports and customer dashboards are presented via print, Web and mobile modes of delivery. Examples of a high-quality customer experience include:

• Alerts on various types of mobiles and tablets. • Early-warning systems for equipment performance. • On-demand interaction with service representatives. • One-click service scheduling.
These approaches enable manufacturers of all sizes, shapes and products to reinforce their brands and boost customer retention. The HVAC equipment manufacturer again presents an interesting example. This manufacturer has historically provided a valuable contract-bound service by sending highly critical alarms by e-mail to customers regarding their installed equipment. The alerts include the equipment name, equipment location, information regarding the root cause of the alarm and other details, wrapped in a string of characters that could be very difficult to interpret.

As an increasing number of manufacturers move toward a more mature service-focused model, many are adopting innovative practices and, at times, borrowing ideas from other industries.
Working with us, this client created a customer service and branding strategy around this seemingly mundane, transactional activity. Together, we:

• Revamped the delivery format, extending delivery to new channels, including
smartphones and tablets.

• Added one-touch service request capabilities that allow customers to request
service calls, schedule service appointments and interact with service representatives instantly.

• Provided estimates of time and cost of potential service visits based on the clas-

sification of the problem. This went a long way toward improving transparency of the aftermarket services and building the service brand.

These changes resulted in an overwhelmingly positive response from customers as well as internal field service personnel, who were very pleased with the system’s visual experience and ease of use. The average adoption rate increased from under 10% to over 70%, trending higher each month. It is important to note in this example that no change was made to the delivered content, just to the customer experience. These new customer touchpoints present new cross-sell and upsell opportunities, such as control system sales, new equipment sales, parts sales, premium contracted service sales that include regular technician visits, advisory contract sales, and contract upgrades to a higher level of monitoring and service. They also help convey the value proposition of the manufacturer’s brand and render the standalone service as a distinctive brand experience.

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Unbundling Services: Greater Monetization Opportunities
As an increasing number of manufacturers move toward a more mature servicefocused model, many are adopting innovative practices and, at times, borrowing ideas from other industries. The pay-per-view model in the cable television industry stands as a good model of this. One of our prominent clients, a large diversified industrial manufacturer, had devoted considerable resources to developing service offerings such as performance alerts, remote monitoring, periodic technician visits, advisory services and service recommendations, packaged with financial analysis across standalone or portfolios of facilities and equipment. The service offerings were a standard list of services, packaged in a variety of combinations, targeting various customer segments and offered at various price points.

Unbundling service offerings with no contracts offers great flexibility to potential customers and offers traditional manufacturers the ability to further strengthen growing service operations.
Extending the cable television analogy, this manufacturer has now decided to make the service offerings completely customizable. Customers will soon be able to select desired services from the list at hand and pay for each individual service. Such an approach will allow the manufacturer to reach a massive, previously untapped part of the market: traditional mom-and-pop service reselllers. Customers that seek such service providers typically do not want to pay a premium for a bundled offering or a top brand. They are value customers that want only a specific service and are willing to pay for just that service. The manufacturer is now contemplating increased monetization opportunities for individual services and also enjoys intelligence regarding the most in-demand services. Such insights have allowed the company to focus on strengthening service operations in the most sought-after areas and enhancing the less popular services. Unbundling service offerings with no contracts offers great flexibility to potential customers and offers traditional manufacturers the ability to further strengthen growing service operations. These are some relatively small but high-impact changes in the manufacturing industry that will raise the competition for market share and revenues to a new playing field. With increasingly flat revenues in the traditional area of operations, manufacturers stand to gain more for their dollar by focusing their attention on services.

Looking Ahead
In a climate of slow growth, manufacturers are shifting their attention to establishing new and enhanced service capabilities as potential sources of new revenue. These companies are exploring new ways to strengthen their service models, such as investing in the SMAC Stack to improve their capabilities and diversify their portfolios.

Part 2 of this white paper series will detail major benefits and critical challenges that manufacturers encounter in their endeavor to leverage aftermarket services as a driver for future growth and sustainable competitive advantage. It will also demonstrate how manufacturers can get started with their aftermarket services strategies by applying a proven capabilities assessment framework that provides actionable insights on simple market entry points.

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Footnotes
1

“Aftermarket to Dominate Revenues for Equipment Manufacturers,” Monitor Daily, Aug. 28, 2013, http://www.monitordaily.com/aftermarket-dominate-revenues-equipment-manufacturers/. Ibid “Manufacturing the Future: The Next Era of Global Growth and Innovation,” McKinsey Global Institute, November 2012, http://www.mckinsey.com/insights/manufacturing/the_future_of_manufacturing. Ivanka Visnjic, Andy Neely, and Frank Wiengarten, “Another Performance Paradox? A Refined View on the Performance Impact of Servitization,” Cambridge Service Alliance at the University of Cambridge, UK, May 2012, http://www.cambridgeservicealliance.org/uploads/downloadfiles/Alliance%20Paper_ Another%20Performance%20Paradox_May%202012.pdf. Glen Allmendinger and Ralph Lombreglia, “Four Strategies for the Age of Smart Services,” Harvard Business Review, October 2005, http://hbr.org/2005/10/four-strategies-for-the-age-of-smartservices/ar/1. Ibid

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About the Authors
Nikhil Kulkarni is a Consultant within Cognizant Business Consulting’s Manufacturing and Logistics Practice. He has over eight years of experience in business and technology consulting and has worked on numerous strategic business transformation and technology implementation engagements. His experience includes working with clients on new product/service development initiatives, business process re-engineering, and mobility-based customer engagement strategies. Nikhil holds an M.B.A. from the University of Connecticut and graduate degrees in Industrial Engineering and International Affairs from the University of Florida and Georgia Tech, respectively. He can be reached at Nikhil.Kulkarni3@cognizant.com | LinkedIn: www.linkedin.com/in/nikhilvkulkarni.

Mark Hadler is a Consulting Partner and leader of the Business Transformation practice within Cognizant Business Consulting. He focuses on assisting organizations develop strategies, systems and solutions to improve their profitability, increase their customer’s satisfaction and extend their service offerings. Mark has over 23 years of combined industry and consulting experience, advising clients on transforming and optimizing their processes. Prior to joining Cognizant, Mark held various leadership positions at Deloitte Consulting and Harley-Davidson. He holds an M.B.A. from Marquette University. He can be reached at Mark.Hadler@cognizant. com | LinkedIn: http://www.linkedin.com/pub/mark-hadler/1/836/532.

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About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 171,400 employees as of December 31, 2013, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

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