State of Service Management

State of Service Management Forecast for 2012 January 2012 Sumair Dutta, Aly Pinder

State of Service Management: Forecast for 2012 At Aberdeen's 2011 Chief Service Officer (CSO) Summit, David Hare, Senior Vice President for Enterprise Services at Symantec stated, "We are transitioning from a model where everyone sells to one where everyone serves." This statement served to summarize the general consensus of business executives attending the CSO Summit, highlighting the growing importance of service and support to organizations. In fact, 64% of attendees at the CSO Summit indicated that their organizations were placing more importance on service, especially given current economic conditions. January 2012 Research Brief Aberdeen s Research Briefs provide a detailed exploration of a key finding from a primary research study, including key performance indicators, Bestin-Class insight, and vendor insight. This document will describe the current state of the service enterprise, and reveal the goals and investments prioritized by service leaders (over 200 polled in a recent Aberdeen survey) for 2012. It will also reveal the performance benchmarks of leading service organizations, and divulge the strategic elements that contribute to Best-in-Class performance. Building a Profit Empire In Aberdeen Group's 2011 State of Service Management research (September 2010), 61% of 242 organizations indicated they were operating service as a profit center. In a similar survey conducted in December 2011, 68% of 215 service business leaders indicated a profit-centric affiliation for their service organizations. Figure 1: To Profit or Not to Profit 2010 2011 Don t Know, 2% Classification Criteria Aberdeen's Research Identifies: Small Organizations: Annual revenue of $50m or less Managed as a Profit Center, 61% Not Managed as a Profit Center, 39% Managed as a Profit Center, 68% Not Managed as a Profit Center, 30% Mid-Size Organizations: Annual revenue of $50m to $1b Large Organizations: Annual revenue of $1b or more Percentage of respondents, n=215 Percentage of respondents, n=215 Source: Aberdeen Group, December 2011 This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

Small and mid-size service organizations (SMBs) surveyed were much more likely than their larger counterparts to run service as a profit center. While 74% of SMBs operated service as a profit center, with P&L goals in place, only 59% of larger organizations had a profit-centric approach to service. In 2011, smaller organizations have been more responsive to the changing dynamic of service, while larger organizations have yet to realize or yet to react to service's increasing importance. Aberdeen's data indicates that they are reacting, albeit slowly: 65% of larger organizations indicate that service will be operated as a profit center in 2012, in comparison to 78% of SMBs (and 72% of all polled organizations). Overall, organizations have yet to reap the profitability they desire from their service businesses. While 68% of organizations indicate the return of a margin in their service businesses, the average organization saw a slight dip (-0.5%) in service margins over the previous 12 months. As a result, service organizations rate themselves only slightly better than average with regard to forecasting and meeting Service Profit and Loss (Table 1). Table 1: Room for Improvement Ability of Service Organization Average Score, 1- Poor, 5-Excellent Retain Desired Customers 3.7 Deliver a Consistent Service Experience to Customers 3.5 Improve Service Margins 3.3 Accurately Forecast Service P&L 3.3 Meet Service P&L Expectations 3.3 Collaborate Effectively with Other Business Functions 3.3 Source: Aberdeen Group, December 2011 The Most Profitable Before unveiling the characteristics of organizations that have been successful in improving service margins, it is important to discuss the metrics Aberdeen used to determine the Best-in-Class. For the purpose of a comprehensive service organization review (such as this one), it is appropriate to analyze performance based on a combination of strategic customer-facing and profitability metrics (Table 2). Organizations were rewarded not only for current performance, but also for their ability to improve key metrics over the previous 12 months. "Because sales of machinery can no longer capture the margins, therefore Parts and services provide the liquid revenue." ~ Glen Dark, Western Regional Service Manager, Stiles Machinery Inc. Insight: Profit vs. Customer Goals The goals of attaining service profitability and improved customer satisfaction are intertwined and not mutually exclusive. An organization does not have to sacrifice the pursuit of customer excellence to ensure operational sustainability and profitability. This is revealed through Aberdeen's survey where those organizations reporting 30% or more service margins outperformed those with sub 30% margins in customer satisfaction (81% vs. 79%) and retention (84% vs. 82%). Conversely, those organizations reporting a greater than 90% level of customer satisfaction and retention outperformed others in terms of service margins (32% vs. 27%) and service revenue growth (7.4% vs. 4.1% over the previous 12 months.)

Table 2: The Cream of the Crop Average Result Metrics Best-in-Class All Others Service Margin 39% 24% Customer Satisfaction (% of Customers Satisfied) 92% 74% Customer Retention 95% 78% y/y Change in Service Revenue 12.5% 1.9% y/y Change in Service Cost -1.6% 3.9% Source: Aberdeen Group, September 2011 As seen in Table 2, Best-in-Class service organizations drive higher profitability as a result of vast improvements in service revenue, and strict discipline on service costs. In fact, leading organizations have seen a 2% increase in service margins over the previous 12 months, compared to a 1% decrease for all other organizations. This rise in profitability is directly attributable to a disciplined approach toward meeting and exceeding customer expectations regarding service, resulting in higher satisfaction and retention rates which ultimately yield more spend, and thus more revenue for the business. Excellence in supporting the customer directly contributes to profitability for leading organizations. Customer needs shouldn't be sacrificed in the face of costcutting or other service growth initiatives. The Service Organization: A 2011 Snapshot Most respondents (79%) indicate having a VP-level or senior executive in place to support and oversee a profit-centric service organization, whereas in 2010, only 64% of respondents had such an executive. The existence of a senior service leader (not yet the Chief Service Officer) at 8 out of 10 organizations indicates that companies are placing more importance on service and on the profitability prospects of service. In the 2011 State of Service research survey, 'all other' organizations were on par with the Best-in-Class with regards to having a senior service leader in place (81% for the Best-in-Class vs. 79% for all others). However, Best-in- Class organizations were much more likely to provide their service leaders with more autonomy by structuring service as an independent business unit. Sixty-one percent (61%) of the Best-in-Class operated service as an independent unit, as opposed to 52% of all other organizations. Conversely, other organizations were slightly more likely to have service report directly to operations than were the Best-in-Class (27% vs. 17% for the Best-in- Class). The impact of a service leader and an independently run service business is felt primarily in customer facing metrics, especially in customer retention. Insight: Benchmark Performance While the following metrics weren't used to determine Best-in-Class, these organizations revealed significant out-performance in comparison to all others: SLA Compliance Best-in-Class - 91% All Others - 78% Contract Renewal Best-in-Class - 86% All Others - 76% Asset Uptime Best-in-Class - 91% All Others - 80% First-Time Fix Best-in-Class - 85% All Others - 72% Service Workforce Utilization Best-in-Class - 82% All Others - 76% Net Promoter Best-in-Class - 73 All Others - 56

All organizations with both a service leader and an independently operated service business retained nearly 84% of their customers, compared to a 73% retention rate for organizations without these attributes. As a result, those with senior service leadership and an autonomous operating structure also experienced a greater (5.7% vs. 4.3% for others) increase in service revenue over the previous 12 months. Service leadership that understands the link between customer satisfaction and business profitability is critical to ensuring that customer-facing needs aren't sacrificed in the short-sighted pursuit of profitability initiatives. With oversight of the entire service organization, service leaders can make needed investments to enhance customer service, while fostering collaboration and innovation in the creation and delivery of new service business models aimed at boosting profitability. Forecast for 2012: Competing for Service Dollars While 72% of all organizations anticipate generating a profit margin on their service operations next year, their fortunes will be significantly impacted by the uncertain and volatile economy, as was the case the in 2011. In a poll of attendees at Aberdeen's 2011 CSO Summit, 80% of respondents forecasted a no-to-low growth recovery for the economy in 2012. Therefore, it isn't surprising that the uncertainty in the global economy is a market pressure expected to impact service leaders in the next 12 months (Figure 2). Economic malaise mainly manifests in reduced customer spending on products and services. Service leaders will have to fight for every dollar of customer spend, which makes having a satisfied customer base even more important. As Aberdeen's Service Management research has revealed, a higher level of satisfaction leads to retention and loyalty, which in turn results in consistent, if not increased, year-over-year spend. "Yes, our company has increased the importance and visibility of the services role in the company; not for the economic environment only but because the customers are demanding it in our industry." ~ Mauri Korhonen, Senior Director North American Service, Mid-Size US Computer Equipment Company Figure 2: Competitive & Economic Pressures Drive Service in '12 Competition in Product and Service 57% Reduced Customer Spending 44% Global Economic Uncertainty 39% 0% 20% 40% 60% Percentage of Respondents, n=215 Note: Respondents asked to select top two. Source: Aberdeen Group, December 2011

The fight for customer wallet share is even more difficult given the increasing competition in both the product and service realm. From a product perspective, a flatter world allows for easier access to lower priced labor and products, placing pressure on overall margins. In the service space, there is increasing competition for the customers' dollar, through either third-party service or services organizations or competing manufacturers looking to provide multi-vendor services to boost their revenue streams. Once again, this raises the premium on loyalty--loyal customers will continue to spend in the face of increasing competition. In the midst of these market pressures, the top goals for service leaders to accomplish in 2012 are to continue to improve customer satisfaction and loyalty while enhancing revenue opportunities from the customer base (Figure 3). In comparison to last year's State of Service Management research (September 2010), the top three priorities remain the same; however the intense focus on revenue growth has been slightly muted. In 2010, 43% of organizations indicated that service revenue growth was their top goal for 2011. In 2011, organizations have either attained their revenue objectives, or have begun to understand the balance between customer satisfaction, retention and revenue. Revenue cannot be attained without a loyal and satisfied base of customers. In fact, organizations that reported a 90% or more level of satisfied customers and a 90% or more retention rate saw a 7.4% increase in year-over-year service revenue, compared to a 4.1% increase for organizations with a sub-90% performance in both metrics. [Service] Always has had a high importance, we escalated ours because our competition cannot provide the level of service we can. Therefore our market presence in all sections of our business has increased." ~ Glen Dark, Western Regional Service Manager, Stiles Machinery Inc. Figure 3: Goals for 2012 Increase Service Revenues 25% 43% Improve Customer Satisfaction 17% 22% Increase Customer Retention / Loyalty 12% 17% Goals for 2012 Goals for 2011 0% 10% 20% 30% 40% 50% Percentage of Respondents, n=215 (2011 data), n=242 (2010 data) Note; Respondents asked to select only one. Source: Aberdeen Group, December 2011 Getting Ahead in 2012 To attain revenue and customer satisfaction goals in 2012, Best-in-Class organizations are prioritizing internal improvements to all levels of their workforce and enhancements to their technology infrastructure. These

improvements are aimed at supporting innovation toward new service and services development, to enable these organizations to entrench themselves further in their customers' minds and pocketbooks, while allowing for greater differentiation. Figure 4: Setting Sights on 2012 Goals New Service (and Services) Development 42% 37% Service Technology Infrastructure - Upgrades 22% 33% Service Leadership 31% 33% Insight: Service Revenue Growth Workforce Management Note: Respondents asked to select top three. Source: Aberdeen Group, December 2011 New Service and Services Development To differentiate themselves grow revenues, service organizations are looking to provide new value-added services while offering additional pricing and contractual terms. Aberdeen Group's research on "service revenue" (Service Revenue: the State of the Market, October 2011) elaborated on this theme. That research revealed the development, support and pricing of service offerings and contracts are core areas of focus for service revenue growth in 2012 (see Sidebar). With the substantial asset or product usage data now available from either direct performance monitoring or analysis of failure, repair, and replacement rates, service organizations can develop and charge for services like reporting, training, consulting, and asset management. These services are generally aimed at: Reducing the management burden on the end-user Improving intelligence available around the use of the product / service Allowing for a more predictive and preventive service experience All of these allow for a more strategic (and renewable) relationship with the end-user, as opposed to a traditional transaction-oriented break / fix or repair relationship. While the sale of new service contracts continues to be the primary medium of revenue growth for service businesses, 53% of the 17% 28% Best-in-Class All Others 0% 10% 20% 30% 40% 50% Percentage of Respondents, n=215 Top Initiatives to Drive Service Revenue (% of Best-in-Class) Service pricing and pricing optimization - 69% Introduction of new service offerings - 59% "Service revenue is very important to the success of our business. On a scale of one to 10, it would be an 11. Service provides opportunities to innovate and move away from the commoditization pressures that can characterize equipment selling. This is our chance to innovate, create, uncover, and deliver solutions and excel; and we need to do that." ~ Lou Ronsivalli, Trane Commercial Systems Global Service Offers Leader, Trane-Ingersoll Rand

Best-in-Class indicate that the sale of value-added services will have a higher impact on and contribution to service revenue in the next 12 months. Technology Upgrades As a third of the Best-in-Class are prioritizing technology upgrades to meet growth objectives, nearly 90% of that group (89% vs. 73% for all others) indicate an increasing or constant budget for service automation solutions in 2012. Larger organizations are more likely to forecast an increasing service automation budget in 2012 (52% of larger organizations vs. 36% of small organizations). Table 3: Making Technology Upgrades Functions that Will See Investments in Technology Percentage of Bestin-Class Respondents Field Service 50% Service Call Center 44% Service Contract/Warranty Management 36% Asset Management 31% Billing and Account Management 31% Note: Respondents asked to select top three. Source: Aberdeen Group, December 2011 As Table 3 shows, the Best-in-Class will invest in technology upgrades in many key areas of business, starting with the vital components of field service and the service call center (Tables 3 and 4). Service employees in the field or in the call center interact with the customer most frequently (especially after a sale is completed), and therefore must be empowered with the tools and information they need to resolve customer requests productively and efficiently. Beyond those central functions, the investment trend for the Best-in-Class confirms their focus on service revenue for the next 12 months. They are shoring up service contract and warranty management to stabilize the most important piece of revenue generation, and investing in asset and billing management to build a basic foundation to create and support new value-added services. With better asset monitoring, leading organizations can capture more data and improve visibility into product performance, to aid preventive service and also provide optimization or information-based services. To support these new services, from an accounting, revenue management, and billing perspective, leading organizations are also looking to shore up their billing and account management platforms to handle net new revenue streams. From the perspective of an actual solution shopping list, we once again see the Best-in-Class focused on automating field service and customer management processes, and on improving their billing and revenue management platforms. Insight: Service in the Cloud Only 19% of organizations indicate that their 2011 automation roadmaps were impacted by the cloud. Looking into 2012, 46% of organizations indicate that cloud computing will impact their automation roadmaps.

Table 4: The Tech Shopping List Solutions Prioritized for the Next 12 Months Percentage of Bestin-Class Respondents Percentage of All Respondents, n=215 Customer Relationship Management 36% 26% Mobile Field Service 31% 22% Self-Service Portals 28% 27% Call Center Automation 28% 15% Billing and E-Commerce 28% 20% Knowledge Management 25% 23% Note: Respondents asked to select top four. Source: Aberdeen Group, December 2011 Leading organizations also plan to invest in knowledge management solutions, to improve collaboration and knowledge sharing between the internal functions of service, and between service and other business functions like sales, marketing, HR, and engineering. Workforce Management and Leadership On the grounds of collaboration mentioned above, 2012 will see service and HR executives work closely to build a more productive, customer-focused and engaged workforce. This trend was featured at Aberdeen's Chief Service Officer Summit, where organizations such as Pitney Bowes, Avnet, NCR, and Best Buy discussed how service workforce engagement has been a pillar of their growth. "The capability most important in ensuring the success of a profit-centric service business is the human factor. To find the right fit workforce who has the attitude, knowledge and skills to excel in their performance (core competencies)" ~ PhD. Hassan El-Haridy, CEO, Contacts Plus Organizations surveyed anticipate minor increases in service workforce headcount in 2012, with an average 3.3% increase forecasted for field service and a 1.6% increase in the call center. Investments are being made to improve the efficiency, productivity and engagement of the service workforce. Seventy-eight percent (78%) of the Best-in-Class, and 74% of All Others, anticipate increasing their focus on workforce engagement in the next 12 months to improve productivity and customer satisfaction (top two reasons picked). To increase employee engagement, the Best-in-Class have mapped out a comprehensive plan relying on technological support, as well as guidance and orientation from service leadership around organizational objectives and career development (Figure 5).

Figure 5: Raising Engagement Empower service workers with selfservice and mobile technology 57% Provide better visibility into organizational goals and objectives 54% Improve 'people management' skills of service leaders 43% Establish or reinforce programs that focus on career development paths 39% 0% 20% 40% 60% Percentage of Best-in-Class Respondents Note: Respondents asked to select top three. Source: Aberdeen Group, December 2011 Executives at the Best-in-Class already believe workforce engagement is vital, rating it a 4.1 on a 1 to 5 scale of importance, where 5 is the most important. This priority is justified, as seen in Table 5: organizations with a 70% and higher level of workforce engagement outperform those with lower engagement in customer satisfaction and profitability metrics. In Aberdeen's 2011 State of Service Management survey, Best-in-Class organizations had a 74% level of service workforce engagement, compared to 68% for Laggard organizations. Table 5: Ignore Engagement at Your Own Risk Metric Service Workforce Engagement > 70% Service Workforce Engagement < 70% Customer Satisfaction 82% 69% Customer Retention 86% 72% Service Margins 30% 24% Source: Aberdeen Group, December 2011 Case in Point - Large Global Industrial Equipment Manufacturer Despite managing its service operations as an independent profit center, a semiconductor processing equipment company with global operations continued to be challenged by an uncertain economy and increased competitive pressures driving down margins in 2011. The company understood that it needed to continue to provide an innovative customer experience while ensuring that its differentiated product / service offering exceeded the expectations of its customers. As a global service Competition has expanded down to the part level. We are no longer only competing in costs, we also need to protect our intellectual property on parts. ~ Managing Director Service Operations, Large Global Industrial Equipment Manufacturer

organization, the company not only needed to be able to navigate a competitive landscape within a challenging economy, but also to manage risk throughout its service supply chain (i.e., natural disaster disruptions). When looking to transform the service organization, the company understood that there was no special recipe for success. The company focused on four key areas to elevate the service business into a strategic leg supporting the overall organization: Process to ensure the entire organization understands the value of service and the importance of serving the customer, Professional and personal development training for all service employees throughout the year, Service culture continuous improvement; taking the methods of Lean Six Sigma and using them to improve service processes specifically, Increased communication, not only from a strategic management level: periodic meetings with the entire staff to discuss the organization and future of the service business. The company used these four focal points of process and organizational capabilities to establish its service organization as a leader not only internally as a profit center but also with its customers building strategic partnerships. As the company continues down the road to service differentiation, it plans to enhance its technological capabilities in regard to parts management and remote diagnostics in the coming year, while maintaining its position as an innovator in customer service. Overcoming the Challenges of 2012 With new revenue plans, upgraded technology, and a re-energized workforce, service organizations are looking to make their mark, not only internally with better P&L results, but also externally in differentiating their value proposition to their customers. An uncertain, volatile economy, and an extremely competitive business environment, stand in their way. Happy employees generate happy customers. A lot of our employees are customer facing. Even our back office support team support the customer facing employees which make all of our employees integral to customer service delivery. ~ Managing Director Service Operations, Large Global Industrial Equipment Manufacturer

Figure 6: Roadblocks to Service Growth Economic concerns 39% Cost cutting initiatives take precedent 33% Current technology infrastructure is insufficient 28% Competitive factors 27% 0% 10% 20% 30% 40% 50% Percentage of Respondents, n =215 Note: Respondents asked to select top three. Source: Aberdeen Group, December 2011 Service organizations must follow the lead of the Best-in-Class, and take the following steps to ensure the sustainability of their customer-focused and profit-centric service enterprise: Allow service to operate as an independent business unit with profit and loss goals and objectives (under the oversight of a senior executive) Follow a strict performance management regime that focuses on operational, financial, and customer-facing metrics Increase visibility into service performance across all levels of the organization Improve the integration between service functions such as field service, customer support and parts management Enhance collaboration between service and other business functions such as Sales, Marketing, HR, Manufacturing and Engineering, especially around; - sharing of performance data - sharing of customer feedback - development of customer management workflows Increase focus on workforce engagement Invest in the processes and infrastructure to support new revenue initiatives Stress the integration of technology and automation platforms to ensure a unified, accurate and complete view of the customer throughout the entire service lifecycle "The capability that is most vital in ensuring the success of a profit-centric service business is being able to consistently meet or exceed the expectations of the customer/user; restoral to service first time, and in the shortest amount of time possible (goes to the expertise of the techs)." ~ Vice President of Services, Large US Services Company

2012 will see increasing investment in service and support, not in the form of superficial marketing statements ("No. 1 customer service", "We believe in customer service"), but in the form of using continued innovation to place the service organization at the center of a services and solutions-based differentiation strategy. Not only will this allow Best-in-Class organizations to support their customers better and fend off competition, but it will also enable these organizations to reap sustainable profitability in a bleak economy. For more information on this or other research topics, please visit www.aberdeen.com. Service Revenue: The State of the Market; October 2011 State of Service Management 2011: Achieving Connectivity and Growing Revenue; September 2010 Related Research Delivering a Seamless Customer Experience with Multi-Channel Support; December 2011 Warranty and Contract Management: Intersection of Revenue Creation and Customer Service; October 2011 Author: Service Management Research Sumair Dutta, Research Director, sumair.dutta@aberdeen.com Aly Pinder, Senior Research Associate, aly.pinder@aberdeen.com For more than two decades, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen s research provides insight and analysis to the Harte-Hanks community of local, regional, national and international marketing executives. Combined, we help our customers leverage the power of insight to deliver innovative multichannel marketing programs that drive business-changing results. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 854-5200, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. (2011a)