How Disruptive Technologies Are Opening up Innovative Opportunities in Services

Photo credit: Getty Images How disruptive technologies are opening up innovative opportunities in services

Barathram Ananthakrishnan, Venkat Atluri, Harsha Krishnamurthy, and Senthil Muthiah

Technology and advanced analytics are revolutionizing services— and creating new sources of value for industrial companies that know how to use them. Here’s a roadmap that works.

In search of sustainable ways to grow, industrial The proliferation of connected devices and companies are turning to their vast installed base as sensors, coupled with a thousand-fold increase in a source of recurring revenues and profits. Revenues computing power over the past decade, is opening from servicing, especially aftermarket services and up new ways to deliver services and interact with parts, are generally more stable than those from customers (Exhibit 1). For instance, the IoT (broadly equipment sales and have shorter lead cycles, so defined as a combination of sensors, analytics, they offer a way to counter the cyclical nature of and connectivity) allows industrial companies to capital investments. In some subsectors, such as flow monitor equipment health remotely and develop control, services tend to generate higher margins new commercial offerings, such as outcome- than equipment sales. What’s more, pursuing new based contracts in industries with high downtime servicing opportunities can transform a company’s costs. Industrial companies have started building relationship with its customers by giving it deeper technology-enabled capabilities to take advantage insight into how its products are used. of these opportunities. United Technologies, for

McKinsey & Company HB Disruptive trends are reshaping servicing.

Key trends escription mpact

• By 2025, 50% Digital offerings • Use devices that accurately report reason for failure of workers will led by IoT, AA, to reduce diagnostic time 10–25% be freelance • Use augmented and virtual technology to help reduction in mean technicians complete complex repairs more quickly time to repair

• By 2035, 40% 5–20% Workforce as a service • Workforce is available whenever and wherever of productivity reduction in needed to help reduce spend on full-time employee improvements labor cost will be driven 10–20% by AI Dynamic dispatching • Use dynamic dispatching to reduce idle time and improvement in improve eld technicians’ productivity productivity • By 2021, the Reactive to proactive • Next-generation digital, analytics, and IoT tools 30–40% augmented- reduction in mean service support shift from reactive to proactive service reality market time to repair will reach $108 billion Proactive ful llment of • Anticipate service needs before incident and 10–20 pp customer needs reduce unplanned downtime improvement in customer satisfaction

instance, acquired analytics firm Predikto in 2018 Where the value lies to enhance its predictive-maintenance offerings and Our analysis has identified a pool of approximately scale its digital and analytics capabilities. $40 billion to $110 billion in revenue growth and $40 billion to $60 billion in margin expansion that could Many other companies are starting to apply be captured through tech enablement in industrial advanced analytics (AA) and digital tools to derive services globally (Exhibit 2). This value comes from instantaneous insights into field operations and use four main sources: a 1 to 3 percent revenue uplift them to optimize deployment in real time through from cross-selling, upselling, and new business techniques such as dynamic field dispatching and models; a 3 to 10 percent increase in service revenue remote servicing. These technologies are allowing from smarter pricing of aftermarket parts and industrial companies to deliver a step change in services; and a 20 to 30 percent reduction in field- impact through improved technician productivity, service personnel costs from optimizing demand and reduced mean time to repair, and higher customer labor management. satisfaction. A few leading companies are already achieving Below, we outline the enormous opportunities that considerable success from efforts like these. tech-enabled servicing opens up, consider the value One OEM reduced troubleshooting steps for its potential it unlocks, describe what a successful technicians by 50 percent and increased first-time approach looks like, and review the steps leaders can fixes by 15 percent, enabling it to cut costs and take to begin their servicing transformation. increase market share. And an industrial-technology

How disruptive technologies are opening up innovative opportunities in services 1 HB The value from tech enablement in servicing varies by industry segment.

Revenue growth Margin expansion $ billions $ billions

Automotive1 18–49 15–21

Other mobility2 5–14 ~1

Aerospace/ 5–13 2–5 Defense3

Broader industrials 26–36 & semi- 13–36 conductors4

Total 41–112 44–63

1 Whole value chain including tier-one suppliers, automotive OEMs, and dealers 2 Commercial vehicles and o-highway equipment (e.g., for construction and agricultural use) including tier-one suppliers, equipment manufacturers, and dealers and distributors 3 Includes tier-one suppliers and equipment manufacturers 4 Includes industrials, food processing and handling, motion and controls, industrial automation, and electrical, power, and test equipment across the value chain: component suppliers, equipment manufacturers, distributors, VARs, engineering and services providers, and product companies

provider that turned its field force into a lead- while in others aftermarket revenue was virtually generation engine saw five to ten percentage points nonexistent. of incremental revenue growth. An innovative approach to servicing The scale of servicing opportunities is best assessed With a successful tech-enabled service strategy, a by lifetime value, defined as the total revenue an company can not only gain a deeper understanding OEM can receive from servicing its installed base. of how customers use its products but also increase When McKinsey analyzed aftermarket lifetime the number of customer touchpoints, giving it value in more than 40 Fortune 500 companies more opportunities to explore and respond to ranging from wind-turbine providers to truck customer needs. Our experience of working with manufacturers, we found striking variations from dozens of industrial companies on technology one subsector to another (Exhibit 3).1 In some transformations shows that new value can be industries the lifetime value of the aftermarket created from all parts of the servicing process: was almost equal to the price of the initial product, managing customer demand, optimizing field labor,

2 McKinsey & Company HB Service revenues vary widely by sector.

Equipment Aftermarket = Product lifetime x Lifetime x Average annual lifetime value penetration2 service

% Years % % of sales price Gas turbines 75% 20–50 years 29–77% 4–6%

Helicopters 53% 18 years 32% 4%

Data 43% 4–5 years 70–80% 10–15% storage1

Electric 35% 20 years 21–27% 7% drives

Wind 34% 25 years 78% 1~3% turbines

Heavy-duty 30% 10 years 21–42% 107–367 trucks

Passenger 16% 13 years 42% 4–10% cars

1 Mainly reﬂects spare parts 2 Lifetime penetration is a function of attach rate, and typically shows wide variation between industries

SOURCE: Aditya Ambadipudi, Alexander Brotschi, Markus Forsgren, Florent Kervazo, Hugues Lavandier, and James Xing, “Industrial aftermarket services: Growing the core,” McKinsey.com, July 2017

managing parts, and delivering superior customer as aviation, renewable energy, and mining—have experience (Exhibit 4). started to adopt IoT-enabled condition monitoring to prevent asset breakdowns, but few OEMs as yet Managing customer demand have the infrastructure and technology to offer their Traditionally, the difficulty of predicting and customers monitoring services. managing customer demand has led to high equipment downtime and poor service. Two Leading companies are using four methods to drivers of this unpredictability are the limited use manage customer demand more actively: of scheduled servicing and the low penetration of condition-based monitoring, in which equipment Remote monitoring. By taking advantage of is monitored while in operation. Industries vary in IoT and real-time connectivity, companies can their approach to scheduled servicing, but out-of- continuously monitor the health of individual warranty assets typically suffer lower adoption and assets and entire facilities to predict potential more unplanned repairs. A few industries—such problems and manage demand. For instance,

How disruptive technologies are opening up innovative opportunities in services 3 HB The value in servicing comes from four main sources.

Sources of value Examples of digital levers and enablers

Managing customer demand Flexible asset- Remote monitoring Predictive specific planned Upstreaming and and notifications maintenance repairs remote resolution

Optimizing field labor Flexible workforce Dynamic dispatch Next-generation Performance management optimization diagnostics management 2.0

Managing parts

Predictive demand Virtual parts depot and Network and logistics Dynamic parts forecasting real-time inventory management pricing

Delivering superior customer HB A one-stop solution helps ﬁeld techs manage service requests. experience Digitized Lead generation and Churn and retention Digital self-serve order-to-cash management management applications process 3 They can monitor their performance 1 through KPI dashboards. makers of heating, ventilation, and air Upstreaming and remote resolution. After Field techs receive conditioning systems can connect remotely to identifying issues through remote monitoring, job noti cations from customers 4 building-management systems to evaluate the companies can use digital and analytic tools through a dispatch app, and can They have ready performance of their equipment. By connecting to automate delivery and support services, manage leads. access to info on data from meters, sensors, and control panels dispatching field technicians promptly to jobs customer site, asset, and repair and adding an AA-driven intelligence layer on when they are needed and reducing service- history. 2 top of existing building-management systems, delivery costs and inefficiencies. One company 5 They use a parts- they can continuously monitor and model saw demand for simple repairs fall by 17 percent recommendation app to ensure they energy usage and provide recommendations for after using technologies such as automated They use a have the parts they root-cause appropriate energy-saving measures. The IoT incident-resolution systems to provide remote need before they knowledge-man- arrive at the agement tool to specialist Enlighted has taken this approach support for some 23 percent of service calls. customer. resolve repairs. a step further by using its lighting sensors to identify occupied and unoccupied spaces and Predictive maintenance. A few companies offering innovative space-utilization services. are taking asset productivity to new levels by

4 McKinsey & Company applying advanced analytics to an array of are also taking advantage of data and analytics structured, unstructured, machine-based, and to move from milestone-based maintenance nonmachine-based data to predict when and to condition-based maintenance with tailored how equipment may fail. They use insights from planned-maintenance schedules. this process to optimize the time their technical help desk spends resolving issues and to deploy Optimizing field labor field technicians more efficiently. One oil-and- Although field labor represents the largest share gas equipment manufacturer reduced downtime of cost in most service organizations, it is often from its gas compressor by 70 percent through undermanaged. Companies have little or no visibility such an approach. into employees’ work or schedules, resulting in wasted time, poor service, and lost revenue. In one Planned maintenance. Industrial companies industrial OEM, we found that more than 40 percent are also using technology to combine repairs of a typical technician’s working day was wasted, that would previously have been performed with two to three hours of idle time, up to an hour of separately on different schedules. When an asset unnecessary driving time, and one to two hours of is down, they use analytics to diagnose other avoidable visits. Few companies codify knowledge potential problems, allowing the technicians in effectively, and a customer’s service experience often attendance to perform unscheduled repairs and depends more on the technician than the company. thereby reduce unplanned demand. Companies

HB A one-stop solution helps ﬁeld techs manage service requests.

3 They can monitor their performance 1 through KPI dashboards. Field techs receive job noti cations from customers through a dispatch 4 app, and can They have ready manage leads. access to info on customer site, asset, and repair history. 2 5 They use a parts- recommendation app to ensure they They use a have the parts they root-cause need before they knowledge-man- arrive at the agement tool to customer. resolve repairs.

How disruptive technologies are opening up innovative opportunities in services 5 Four practices can help companies to optimize field Exhibit 5 can help field techs schedule service productivity: requests, check that they have the right parts, and understand the root causes of a breakdown. Flexible workforce management. To ensure Some automotive OEMs have begun to diagnose sufficient capacity and enable effective demand issues remotely using telematics signals sent forecasting and schedule planning, companies from vehicles. A central team uses the signals to are using digital tools that connect demand and give technicians a preliminary diagnosis, saving supply in real time. By using digital scheduling them time and reducing wait time for spare tools to seamlessly manage an efficient mix of parts. internal workers and subcontractors, companies can be responsive to customer needs without Performance management 2.0. Robust incurring large fixed costs. One industrial- performance management helps companies services company estimates incident rates pinpoint where service labor needs and service volumes with the help of real-time improvement. By combining optimized external data feeds such as weather patterns, scheduling with technology-driven process then uses this expected demand to schedule improvements, they can improve wrench appropriate workforce capacity. Another time (the time a technician spends actually industrial company that introduced flexible performing necessary tasks). One industrial scheduling was able to reduce overhead company introduced real-time dashboards by $35,000 per technician and cut overall with granular data and was able to boost field technician costs by 50 percent. productivity in its regions by 7 to 20 percent.

Dynamic dispatch optimization. In our Managing parts experience, field-management systems rarely A badly managed spare-parts operation can not only provide accurate visibility, and job-booking hurt revenue but also damage customer satisfaction allocations seldom reflect task times. It’s not and loyalty. When a part required for a repair or unusual to see more than a third of each day lost service isn’t available, repair time increases, the through late starts, early finishes, and other customer’s experience is poor, and future revenue unproductive time. By using sensor data and from that customer may be jeopardized. Getting fleet telematics to track technicians’ schedules a part shipped to the repair point causes delay; in real time, companies can add 20 to 30 percent meanwhile, technicians get reassigned to other tasks to the working day. One leading telecom provider and the job goes to the back of the queue, often taking introduced an automated job scheduler that days to complete. When a part isn’t essential to a allocates technicians all their jobs for the day repair or service, not having it in stock could mean and adjusts their schedules dynamically to the company loses revenue—and upselling and cross- maximize productive use of time. selling opportunities as well—if the customer doesn’t return to buy it later. Next-generation diagnostics. To perform a robust diagnostic, technicians need the right Companies optimizing parts management tend to tools. Ideally, a diagnostic kit would cover model focus on four areas: year, repair history, customer questionnaire, suggestions for diagnosis, detailed problem- Predictive demand forecasting. Most demand- solving manuals, and lists of parts needed. A management systems still rely on historical sales mobile one-stop solution like that illustrated in patterns, but the introduction of technologies

6 McKinsey & Company such as radio-frequency identification (RFID) industrials distributor, we found that using alongside big data and advanced analytics allows analytics to manage stock at the level of SKUs companies to move to predictive forecasting and repair points increased stock-on-shelf by instead. By anticipating when an event is likely more than 50 percent. to happen and predicting what parts will be required when it does, companies can increase Network and logistics management. first-time fix rates and improve customer Supporting a distributed field organization satisfaction. requires a well-managed fleet, something companies often struggle to achieve. To unlock Virtual parts depot and real-time inventory. value, they need to harvest and integrate large In a distributed field organization, the sheer sets of granular fleet data—GPS tracking, size of the installed base and range of potential routing histories, and the like—that often go repair locations makes inventory management untouched because of resource constraints or challenging. One solution is to convert every the proliferation of data warehouses. In one technician’s truck into a virtual repair location industrial OEM, we found that the use of digital by combining predictive forecasting with a and analytics can typically reduce fleet costs real-time inventory-management system that by 7 to 12 percent and spare fleet by 10 percent, uses RFID or similar technologies to track the while improving availability by 5 to 10 percent. parts carried by each technician. Companies seeking real-time visibility of inventory and data Dynamic parts pricing. Another area where across their network will need to invest in digital tech enablement helps companies create value tools to keep track of inventory and advanced from parts management is pricing. Once a robust analytics to support flexible allocation. In one technology infrastructure is in place, companies

HB A self-serve app gives customers transparency throughout the repair process.

1 Customer reports fault and receives uiment noti cation that a eld tech has been assigned. 3 2 Customer gets live noti cations Customer can throughout the interact with repair process. self-serve applications such as chat bots to schedule and track services.

How disruptive technologies are opening up innovative opportunities in services 56 can apply advanced analytics to probe supply offers are most likely to help retain them. One and demand at the level of individual parts industrial company aggregated data from and introduce dynamic pricing. This involves contract, sales, product, and customer records replacing standard prices with prices tailored into a data lake, mined it using advanced to individual customers, locations, and parts or techniques, and then applied predictive kits based on variables such as price elasticity, analytics to estimate churn and evaluate the competition, product uniqueness, and customer effectiveness of personalized customer offers. bargaining power. After introducing dynamic This enabled it to introduce a differentiated pricing, some OEMs have been able to capture sales strategy that increased the attach rate for pricing improvements approaching 10 percent. service contracts by 90 percent.

Delivering superior customer experience Digitized order-to-cash processes. Accurate Great customer experience comes from delighting and timely billing is critical in servicing, yet the customer at every stage in the service process, few companies do it well. Customers frequently not just at one or two touchpoints. complain about inaccurate billing and unresponsive customer service. Companies Companies that excel at customer experience can address these challenges by adopting use tech-enabled capabilities in three areas in technologies such as robotic process automation particular. to manage tasks across the order-to-cash process. Digital self-service applications. One of the biggest pain points for industrial customers is an Getting started opaque servicing process that leaves them with Growing service revenues through technology unanswered questions: What is the problem with enablement requires different approaches their equipment? What caused it, and how can it in different circumstances, but all industrial be prevented in future? What is the breakdown companies would do well to take a few basic steps: of the service cost? Which stage has servicing reached? When will it be finished? Through a Don’t solve complex data problems; find combination of sensors, GPS technology, app- simpler ways to get the data you need. enabled field technicians, and digital check-in For companies with disparate systems and checkout tools, industrial companies can and a distributed workforce, building a now keep customers informed of progress and comprehensive, reliable data source is no any changes to plan through automatic updates. mean feat. Service data is often unstructured, Exhibit 6 illustrates a reimagined customer and integrating data from multiple sources is experience in which digital and mobile tools difficult. Some companies compromise by using provide visibility at every step in the service partial or observational data. But advanced process. data-extraction technologies and data lakes now allow companies to build a rich granular Churn and retention management. As in database in a matter of weeks, while cheap data any industry, it costs much more to acquire storage enables them to store data in any format a new customer than to retain an old one. or volume indefinitely. Thus equipped, they can By analyzing data across multiple customer rapidly analyze granular data at low cost and in a touchpoints, industrial companies can predict scalable manner. which customers are at risk of churn and which

57 McKinsey & Company Define technology-enabled service offerings. Balance cost with customer experience using Develop a deeper understanding of your end digital tools. Field technicians usually represent customers’ economics at subsegment level across the lion’s share of costs and offer the greatest your business units, brands, and revenue and scope for improvement. Develop initiatives such profit pools. Segment service needs and identify as real-time tracking tools to drive dynamic where technology could be a key differentiator. dispatching, optimize time-and-task and Design a service strategy that uses data first-time-fix rates, and reduce performance generated—now or in the future—by the variability through granular analytics. Enhance installed base for your equipment. To craft a new customer experience by offering more self-help value proposition, create technology-enabled capabilities. offerings for both your customers (such as remote monitoring) and your field technicians Follow a phased approach with a clear (such as digital diagnostic tools). roadmap that ties technology to your service strategy. Adopt a two-speed approach to Enhance your digital, analytics, and technology: quickly deploy capabilities that technology capabilities. Taking into account support the customer experience while you your customers’ needs and your technicians’ work methodically to integrate back-end pain points, work out which capabilities you functions. Rapidly pilot new tools and analytics, require, which you have already, which you need and refine your technology roadmap as you go. to develop, and how differentiated you are from Schedule the rollout of initiatives, the high-level competitors. Form an integrated view of the investment plan, and quick wins. Determine capabilities you need, and build them in phases. what performance-management mechanisms Look at the broader technology ecosystem, you need to sustain impact. evaluate data and analytics solution providers, and partner with them where necessary.

Integrate your commercial strategy across field tech, inside sales, and direct sales channels. The next wave of service transformation is here, Tailor your sales approach to drive aftermarket and it is being driven by technology. Industrial sales. Provide incentives for sales teams to drive companies that can fundamentally reimagine services as well as OEM projects. Equip sales service technology as a core component will be well support staff with analytics tools to help them positioned to achieve above-market growth and mine your installed base for leads and drive superior cost position. contract renewals. Reward field technicians

for parts revenues and sales leads, and enhance 1 See also Aditya Ambadipudi, Alexander Brotschi, Markus their digital tools so they can easily pass leads on Forsgren, et al., “Industrial aftermarket services: Growing the to commercial teams. core,” McKinsey.com, July 2017.

Barathram Ananthakrishnan is a consultant in McKinsey’s Chennai office; Venkat Atluri is a senior partner in the Chicago office, where Harsha Krishnamurthy is an associate partner; and Senthil Muthiah is a partner in the Boston office.

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