The Customer Service Journal

Volume 5 October, 2019

Knowledge for the world of customer service & support

ISSN: 2374-9296

Revenue Management - Knowledge

The Hole in the Service Revenue Doughnut John D. Thomann, Managing Editor, Customer Service Journal Introduction Service organizations are always exploring how to increase their service revenue by expanding their services portfolio. And certainly it is important to evolve your service offerings as new products are introduced and new insights are gained from customer value mapping. But, this blog is not about the development of new service revenue streams, but rather about capturing the service revenue that that companies leave on the table today. It’s about the opportunity for capturing revenue that is in a sense ‘stranded’, or what I call Missing Service Revenue (MSR). The Service Revenue Doughnut To explore the challenges of MSR I would like to begin with the concept of service revenue as being analogous to a doughnut. Think Krispy Crème, or Dunkin Donuts. The circumference of the doughnut is the Total Potential Service Revenue (TPSR). This is the service revenue that could be captured from the entire installed base of products for all of the service programs being offered. The reality of capturing all of that revenue will vary by industry segment. If your equipment is installed in a ‘clean room’, or your equipment is stationary such as inside a hospital then the potential is very high. If your products can easily be moved or traded then the TPSR will be less. The part of the doughnut you can eat is the actual revenue that you collect today. However, as with all doughnuts there is a hole in the middle. And that hole represents the service revenue that is left on the table. This is the Missing Service Revenue or MSR. Another term for MSR is simply revenue leakage. The potential revenue is there for the taking but you have not been able to capture it. The size of the MSR hole will vary depending on the industry segment, product, the service operating model, and/or the service processes and infrastructure. But the hole will always be there. The key issue for service organizations is not that the hole is there, but the issues should be: how big should the MSR hole be and is it getting bigger or smaller? If a company is selling more products than ever before and the MSR is getting bigger then the service organization is in danger of being under funded. I have seen this many times in the last 30+ years especially in situations where companies that increase their sales volume through aggressive lower pricing, but do not address the MSR or doughnut hole. The volume of products needing support increases but service revenue does not increase proportionally. So the funding of support is diminished and the role of service as a profit center comes into question. For many companies knowing the true state of the MSR is rarely analyzed, and not well understood. An example of this are companies that use multiple support models that include channel partners. MSR increases when the the volume of support calls increases, but the associated back-line support pricing remains static. There are many other examples of how MSR increases as a company evolves. The important point is that a periodic review of MSR should take place to fully understand its current state. Is the current level of MSR acceptable or does action need to be taken to reduce it or address any growth that is occurring? The hole in the Service Revenue Doughnut - What's not there? So what are some of the issues that influence Missing Service Revenue? To answer that question we need to look at what is in the service revenue hole in terms of what’s not there. The other questions that need to be understood are; is the size of the hole acceptable, and is it growing larger or smaller? One important point that needs to be understood is that this is not a check-list to say if we fix this problem our MSR will decrease. Rather this is an inter-connected challenge that requires a holistic view point if MSR is to be understood. 
 Installed Base Knowledge – Simply stated, you can’t sell a service to product owners if you don’t know where those products are or who owns them. The lack of Installed Base Knowledge can impact the service programs that you want to sell, as well as, limit the capability to improve Entitlements Management. Many service executives I have worked with have asserted that they know where all of their serviceable products are. Unfortunately, with a few exceptions based on industry segment, experience has shown that even the best of breed service organizations know where only 90% of their products are. For the majority of service organizations in the B2B space the reality can be closer to 75% to 80% at best. The lack of installed base knowledge can also impact Entitlements Management, and of course, Service Contracts. Knowing where the products are is not always good enough. Support pricing is often driven by the version and configuration of some products. So the MSR can be impacted by out of date product information that results in lower contract values. Measuring the accuracy of Installed Base Knowledge is indeed difficult, but getting a sense of the size of the problem can be derived from looking at the impact on the other causes for MSR. Entitlements Management - "We give it away quicker", is the refrain that often have heard from Call Center staff. It reflects the frustration in not having any previous knowledge of a product that a customer is calling about. For some companies this may not be as big an issue as for others. Cisco Systems, in its early days of growth, became a dominant player in its space by giving service away. It could do that by loading the cost of service into its product pricing, on the assumption that the products would be replaced by newer technology within a calculated time window. This had unintended consequences later, but that is another story. Suffice to say that giving away service may work for some companies but not others based on a business plan. If you measure what you give away and their root causes you will have indicators of the size of your MSR. Do it over time and you will have a sense of the dynamics for its growth or contraction. Accurate Service Contracts - Another major influencer are service contracts. Do they truly represent what is installed? Are they transparent enough in their presentation such that the customer will not question their accuracy? Have products been upgraded that require a higher service premium, but are not captured in the service contract? Is the renewal process timely with built in latencies to address customer concerns and issues? I think we all know that these issues will impact the entitlements process. Each of these factors will leave money on the table and add to the MSR, creating a bigger donut hole. Again these can be measured and give you a sense of how big your MSR is and whether it is growing or contracting. Timely and accurate Service Billing – Customers will not pay for services that they don’t remember being performed, or if they question the value of the service that was performed. In working with customers in the past I have often looked at the ratio of service invoices paid to credit memos issued. This can be the first sign that the billing process is broken and needs a closer review to understand the root causes. Another factor here is to understand what the gap was between the customer expectations and what was actually delivered and billed for. How well do you set customer expectations and then deliver against those expectations? Management of new service offerings - The introduction of new service offerings without fully understanding and planning how they will be managed will often grow the MSR hole. I’ve worked with many companies who developed new offerings and presumed that they could be monetized by using existing processes and infrastructure. All too often the new revenue streams were elusive due to the wrong assumptions, and the absence of planning and preparation. This can be fairly easy to measure based on your business plan. Solving these problems are not always simple - While these challenges to reducing the hole in the service revenue doughnut may seem to be simple at first glance, they are not always easy to solve. There can be cultural issues and complexities that have evolved over time. The data structures in the Service Management tools may be limited and need enhancements. So the costs of making changes needs to be considered against the reward of making the MSR smaller. Careful analysis will yield the insights that are needed to identify the solutions and their costs. Some companies have used a road-map approach to make incremental changes that fund that next set of improvements. Another goal of reducing the MSR is to enable the capture of revenue from new support offerings. Offering new programs without addressing the infrastructure to monetize them will only result in growing the MSR. In future Blogs I will be taking a closer look at these issues and the complexities in developing solutions.

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