UAE. In many industrial companies, services play virtually no role. Yet the service business is reporting growth rates up to 40 percent faster than sales of new products. What’s more, the gross profit margin of services is on average a good ten percentage points higher.
These are the conclusions from international management consultants Bain & Company in their latest study, “Winning in Industrial Services,” in which 45 industrial companies underwent an in-depth benchmarking analysis.
In the current economic environment, industrial companies have found it difficult to generate growth. Barring a few exceptions, the investment rate in new plants and systems has been very low. Compounding this is the increasingly tough competition these companies face primarily from Asia but also closer to home.
Some of the most successful industrial goods producers have recognized this situation and expanded their range of services accordingly, visibly boosting their overall results in the process.
As Bain’s analysis reveals, revenues from services business between 2010–2013 climbed by an average 9 percent per year, which compares favorably with slower sales growth for new products, which saw a revenue increase of only 5 percent. Companies with a high service share also accomplish an above-average margin for the company as a whole.
“In the current market climate, services are the only means by which many industrial companies are able to boost revenue and profit,” said Pascal Roth, partner at Bain & Company and author of the study. “Services have the added advantage of strengthening trust and customer ties.”
In a market in which products are becoming increasingly interchangeable, companies can gain t key competitive edge over their rivals by offering a range of state-of-the-art services. But, most industrial companies still have a long way to go before they can achieve this. In machinery and plant engineering, for example, services currently account for only 25 percent of total revenues – although the margin in this segment is very high at 42 percent.
“The service business in GCC is not given the importance it deserves,” said Eric Beranger, partner in Bain & Company’s Middle East office. This may be due to certain prejudices in the minds of the decision-makers, but which the Bain study refutes.
The five myths that surround the service business in the industrial sector:
Myth # 1. Services can only grow in tandem with growth in new business from machinery, plants and infrastructure.
The truth: For many companies, the service business is reporting disproportionately high growth, completely separate from new business. This is primarily due to the companies’ policies of gradually exploiting the potential of their installed base while at the same time developing new service products, which are for their part independent of that base.
Myth # 2. A rapidly expanding service business will soon reach a saturation point in the mature industrialized economies of Europe
The truth: The five companies with the highest share in services according to the Bain benchmarking analysis continued to show above-average growth during the review period. This growth was mainly driven by attracting new customers and offering service solutions to third parties.
Myth # 3. Low margins in maintenance and repairs generally lower the overall service margin.
The truth: Companies with a strong service business generate an average gross margin of 37 percent, even with maintenance and repair work. The right combination of services, target group analysis and an efficient, standardized provision of services is crucial here.
Myth # 4. The fastest-growing service providers are organized as independent companies.
The truth: There is no verifiable growth difference between independent service organizations and services integrated into the new business – both types have their advantages. Services incorporated into the company benefit from factors such as stronger cross-selling potential. By the same token, an independently-run organization has greater business responsibility and can gear its activities specifically to the service business.
Myth # 5. Establishing a service business in Asia is very difficult.
The truth: Industrial goods producers that are extremely successful in the services business achieve an equally high service share in total revenue in Asia, just as they do in Europe or the U.S.
Beranger added: “In a slower economic growth environment such as the one the GCC faces as a result of lower oil prices, services are an important growth driver for industrial companies. Business leaders ought to grant the service business the attention it deserves to sustain their margins in a softening economic environment.”
The significance of the service business for corporate success will indeed continue to increase. According to the Bain study, by the year 2020 industrial companies can expect to double their revenues generated from services.
Photo Caption: Eric Beranger, partner in Bain & Company’s Middle East office.
About Bain & Company, Inc.
Bain & Company, a leading global business consulting firm, serves clients on issues of strategy, operations, technology, organization and mergers and acquisitions. The firm was founded in 1973 on the principle that Bain consultants must measure their success by their clients’ financial results. Bain clients have outperformed the stock market 4 to 1. With 51 offices in 33 countries, Bain has worked with over 4,900 major multinational, private equity and other corporations across every economic sector.
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