Searching for New Profit Ideas in Your Company? Look No Further than the Services Department!
by Jim Sakaguchi

     
   

If you're a maker of hardware or other products with profit margins getting squeezed by the competition, you may want to consider developing new revenue streams from your services department. That's right - your services department, not your product development area. You may be surprised to learn there are several ways to turn service offerings into a competitive advantage and create new profits for your company. In fact, experience shows that services can often command a higher margin than the product itself.

A good recent example is the Apple Computer IPOD. Just think of all the additional accessories and services Apple or Apple's distributors are selling. These services - as well as the accessories -- generate millions of dollars for Apple.

But before you get started, it's important to answer the following questions:

  • What do your customers want in the way of services?

  • What would be the best financial model to set up for tracking purposes and to determine if the investment is paying off?

When determining what your customers want from a services standpoint, there is a right way - and wrong way -- to phrase this question. Customers often respond negatively to the question, "Would you buy our services?"

Therefore, better questions to ask are, "What would make things easier for you?" and "What problems are you having?" Then listen. Often there is an opportunity to create a new and exciting service based on customer input to these simple questions.

Dell Computer turned this approach into a multi-billion-dollar business. Dell offers a variety of services to its customers ranging from home services such as installation and/or trouble-shooting to multiple-year service agreements covering a host of coverage levels. As part of its business-to-business services, Dell is offering everything from hosting services to planning entire IT infrastructures.

Financial Model Alternatives

The next step is to determine how to set up the financial tracking for the services. You'll want to know if the service offering is making a profit, if success is coming from the person(s) driving it or is it just happening? And, if the venture is not successful, you'll want to know why.

These questions are sometimes difficult to answer depending on the financial accounting model used for service sales and ownership. I have worked in several companies (and have been a customer of others) where the financial set-up forced internal groups to compete with each other. When this happens the result is often customer dissatisfaction and loss of sales.

Based on my experience there are four methods of how to track the financial contribution of selling services. Each has their distinctive pros and cons.

1. Separate Product Line:

In the separate product line model, all revenue and expenses for delivering the services are grouped under one Profit/Loss Center (P/L). There is an established product manager who is responsible for all elements. Reporting is shown as a separate profit center.

Benefits of this model:

  • Provides separate profit/loss picture.
  • Justifies independent investment.
  • Measures the effectiveness of selling services as a product line.
  • Carries the clout of being an independent product line.

Negative aspects of this model:

  • Product line and service may have conflicts - what's more important?
  • More accounting transactions required for cross-charging.
  • If service is given away to sell products, this can create conflict.
  • Product margins are misstated and appear higher because free services have not been accounted for in the cost.

2. Separate Within Product Line:

In this option, services are a subset of a product line and sold with the product, i.e., a computer and service contract. Services are defined and sold as separate items so all revenue and profit can be grouped. Reporting of service remains under the product line.

Benefits of this model:

  • Provides view of contribution to the product line.
  • Allows for collaboration investing and trade-off analysis.
  • Measures the effectiveness of selling service as a product.
  • Facilitates teamwork between product and service organizations.

Negative aspects of this model:

  • Product considered more important than services.
  • Service profit could be eroded due to lower priority; product comes first.
  • Fuzzy responsibilities regarding who is responsible for growing service sales.

3. Invisible Within Product Line:

In this option, services are sold with a product and are not shown separately. Service is considered an accessory or embedded with a product, i.e., "One price for all."

Benefits of this model:

  • Increases overall revenue.
  • Easy to roll out.
  • No real maintenance of part numbers or other administration.
  • No argument from customers about purchasing services.

Negative aspects of this model:

  • Cannot determine true value of services sold.
  • Cannot define product/service margins. Could erode product profits.
  • No one really accountable for growing service sales/profits.

4. Region/Country Profit Center:

Here, a region or country is considered the Profit/Loss Center. Services are sold with a product as separate or embedded.

Benefits of this model:

  • Localized service offerings attract new customers.
  • Product sales drives the service sales.
  • Can be reported separately if required. (Countries have separate books.)

Negative aspects of this model:

  • Services will be different all over the world - no global leverage.
  • More administration required within the area/country.
  • Some countries apply more taxes to services.
  • Could create problems if customers want the same offering in different areas/country but they're not offered.

In summary, which works best for your company will be driven by many factors. Consulting with outside experts, who have experience setting up these models, may speed your decision and get you to market faster.

Making service into a profitable business can be done. Many companies have and are doing it. With some pre-planning it can be very profitable.

     
   
     
   

The Author

Jim Sakaguchi Jim Sakaguchi is currently VP of Global Services & Support for a division of Harris Corporation. Throughout his 30-year career working for Tektronix, Inc., Apple Inc., IBM, Intel and other corporate giants, Jim has earned an enviable reputation as a strategist and operational expert who successfully transforms service and support organizations from cost centers into bottom-line contributors. He can be reached at jim.sakaguchi@harris.com .
     
   
     
   
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Copyright 2008 by Jim Sakaguchi. All rights reserved.

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