Are you still driving your Services Business looking in the Rear View Mirror ?

The year was 1996

It was one of the those big days , in Milwaukee we were told that we would get an opportunity to attend one of the famous business reviews . Got up early big day all excited ,my head muddled with all the seemingly intelligent questions that I could ask(kept reminding myself not to ask 2 many) anyways finally got into the big hall – found a nice cozy spot (in the corner) – and the presentations started , one after the other it was like a whirlwind tour , all talked about all the great stuff that’s being done by them and their teams – what is gonna make them king of the world and how they are doing better on a QOQ and YOY basis – what’s QOQ and YOY – well no google in those days and so during the coffee break I sheepishly asked one the presenters on what it meant – he first looked at me as if I was an alien and then oh it’s Quarter on Quarter , Year on Year – business metrics which help determine how well you are doing compared to Last quarter /Last year , boy was I enlightened – the rest of the presentations was a breeze like an obedient student I noted down the QOQ ,YOY growth nos of each business and picking on which business was the better one on this most important metrics. I went back home that evening enlightened with knowledge would change my understanding of the world, business side at least.

As I went home that evening to this day I often wonder “where did this phenomenon of QOQ / YOY emerge from,what’s the history -so if you look at the definition on Investopedia it says “Quarter on quarter (QOQ) is a measuring technique that calculates the change between one fiscal quarter and the previous fiscal quarter. The term is similar to the year-over-year (YOY) measure, which compares the quarter of one year (such as the first quarter of 2020) to the same quarter of the previous year (the first quarter of 2019). In fact if you go a little deeper you will see that QOQ is used more to measure against goals/benchmarks set for the year or to identify seasonal trends/short terms changes in your business. YOY is more used to understand general ,holistic long term organization health and trends. For eg if your business is down by 10% on QOQ basis but is up 5% on YOY basis – it indicates either there is some seasonality in your business and could help identify trends that need greater getting into to really understand what’s happening in your business. It could also help to focus your efforts better whether it is in terms of sales ,marketing or even operations – recognizing seasonal trends, business cycles is an important part of todays Business management techniques – and we could probably debate on that in a separate article. But getting back to our topic it is no secret that most of these Business metrics have been developed by analysts who regularly look at company financial statements and since they are mostly responsible for driving Stock prices/markets – it eventually leads to companies adopting these metrics as a standard for Business reviews across many organizations - Newtons law of Gravity , I guess. But the important point is over the years without any really deeper thought these metrics have been applied across businesses whether its capital equipment , consumer goods , computers , software , telecom etc. The only difference being that anaylsts with Industry specific Domain are able to decipher the results of a company wrt Industry cycle and give a commentary around how well the company has performed viz-a-viz the Industry trend.

The bigger question which however that I seek to address in this paper is ,that is it ,apt ,in todays times to apply these metrics across all businesses ? Specifically I would like to take on the applicability of these metrics in the After Sales Services business. The importance of the Services business for a Capital equipment manufacturer is one which has been settled way back in my opinion – in todays times any company which has a services business which contributes 15-20% and above to its overall business is accepted to be in the league of Companies which are on the curve if not ahead. It is logical to assume that  companies which have 20% or above contribution from Services business lay a solid foundation for customer intimacy and therefore their cost of customer acquisition/retention is much lower than companies whose after sales services business is floundering – in fact it has been a long standing ambition of mine to compare some of the biggest well known Industrial companies and compare their Services business along with the cost of their customer acquisition/retention ,but we will leave that one for another day.

The big question therefore is what is the right metrics to measure the business performance of a services business – isn’t Q-O-Q /Y-O-Y more like driving your business by looking at the rear view mirror ?After all the true measure of companies business one could argue is not really a comparison of current revenue vs historical performance but should really be its performance compared to the market potential. Now having been marketing guy myself one could argue that Market potential can easily get subjective in the absence of data granularity. Market studies by third party organizations are of course a great indication of market potential but for some strange reason whenever I have listened to any of the tens of investor calls – there never seems to be mention of market potential. In my own experience of more than 25 years of working in Emerging markets with MNC’s of Industrial companies – I think in the absence of granular data being available QOQ/YOY performance is an easier way to probably justify all the marketing spends than anything else. But perhaps in one business in which the smartest cannot refute the absence of granular data is Services – after all what’s the potential for your companies Services business – quite simply (hold your breath) it’s the no of equipment’s that you have sold. So, lets say if you have sold a 1000 UPS systems in the last 10 years and we know that it costs roughly 100$ to service a UPS each year – your market potential based on 100 UPS being sold in the last 10 years is 100,000$. Having established that your market potential is 100K $ - it becomes very simple to really understand how well your services business is doing – for eg if your current business is 10,000$ you know that you have been able to monetize only 10% of your installed base ,so looking ahead ( and not in the rear view mirror of QOQ/YOY) you know that you still need to increase your service business penetration to 90% of the market. Once that vision has been established its really breaking it down to the 2 or 3 strategies that you need to play out to get to the market potential ,keeping in mind that you still will keep selling new UPS systems so for those of you who argue that older systems might get decommissioned – there are new ones also being sold ,which and are potential assets for selling services.

For any business the establishment of a Vision is the first step in realizing your dreams and this technique of profiling the Service Landscape based on the no of equipment’s sold over a period of time is the first step in truly monetizing your Asset base. Once that’s is established newer challenges emerge like where are all those assets installed , how many of those assets are still active ,what value proposition does your service offerings really bring to customers  , are your service offerings well positioned , what is your Go To Market , Are your current service offerings enough for serving the complete Asset base that you company has or do you have some gaps ? ,what’s the competition you have in your Asset base and how best can you counter it etc etc.

As simple as this sounds the biggest impact I have experienced with this approach is that all of a sudden the discussion within companies turns into how the vision can be realized – and organizations which are nimble and truly customer focused would then tend to untangle themselves from the plethora of programs and practices developed over the years to come out with a clear cut strategic roadmap on how best to monetize the Service Landscape in the shortest possible time. Of course needless to say there will always be some detractors within companies who would question this service landscape based approach and that’s why its very important to have this approach backed by Senior management within the company to help win them over.

The biggest change is of course that performance is no longer judged on the basis of historical data but based on Market Potential of your Service landscape. The YOY / QOQ metrics they could still be used but to measure how well you are doing in terms of monetizing your Asset Base – thus bringing into sharper focus on Implementation of the Strategic Vision you have established for your companies Services business.

I hope you all enjoy reading this piece as much as I’ve enjoyed writing it.

Sanjay Batra

For any questions/comments feel free to reach out to me at [email protected]