To understand how customer service evolved to where it is today, we should briefly go back to the days where it all began. In the mid 70’s, the explosion of the word processing business, created the new frontier of Office Automation. While printing in the supposedly paperless office we went from
electrics, to printwheels and to lasers, there was a need to connect all these office services together. That’s when Xerox created the Ethernet concept with the Star workstation driving document creation through centralized high speed printing stations like the 2700/8700/9700 etc.
With the movement in the industry away from proprietary to open systems, it gave rise to a huge commodities products market in printers, terminals and computer type products. These products were good, revolutionary and relatively inexpensive, and customers very quickly began to integrate them into existing systems. The dilemma now was that someone had to service them, but soon it was evident that it was not as much a dilemma as an opportunity.
In the early 80’s, the large high tech multinationals were eyeing this new business as an opportunity and ultimately coupled with other reasons, had no choice but to enter the multi vendor service business. It was more so a question of survival, protection of the proprietary base and grabbing of market share in a now already rapidly growing industry. So the break-fix business in the multi vendor service arena was born with many players from large high tech corporations to smaller independents getting into the action. Before that time, customer service existed in a sacred, well guarded and well protected high priced, high margin proprietary environment that only the daring few were allowed to painfully penetrate with extreme difficulty.
The Break-fix Multi Vendor Service Business:
Also known as the Third Party Business, the rapidly growing Multi Vendor service business served its purpose. Today it has become extremely competitive due primarily to the multitude of low labor cost suppliers, readily available cheap gray market parts and the low cost of computer equipment. The thinking used to be that no matter how low the cost, customers would repair equipment at least once, but it may no longer hold true. We have now crossed over to the disposable zone which makes it uneconomical to repair and economical for spare units/systems to be purchased and kept on standby to support or backup urgent applications. From a service providers’ perspective, the margins are too low, the market is shrinking and the large corporations are finding ways of taking this business back. That’s what gave rise to Professional services in the late 90’s.
In the late 90’s the large corporations had to find a way to grow the revenues with higher margin business. So what other services could be provided to customers? How about Professional services. Customers were already asking for other services such as staging and warehousing as they rolled out new systems nationally and this capability did not exist within their core competence bag of services.
Analysis of customer spending habits soon revealed that the break-fix portion of customer spending for any given system was only approximately 15 per cent of the total spending on all other services associated with that system. For example, in the banking industry the break-fix service revenue for an ATM was an average of $2,500 per year while in total, the amount spend by the customer to maintain each unit was about $14,000 per year. This total expense included services from installations, rollouts, project management, refurbishing, warehousing, inventory management, staging, deployment, help desk, supplies management etc etc. So what services could be provided directly or indirectly on a sub-contract basis and still make good margin? Over time service companies cherry picked those professional services that could be provided and expanded their service capabilities to customers but primarily within an already existing base.
So now what’s happening? Along comes Big Blue and moves the services business one more step up the food chain and to the outsourcing level. In other words taking over all or portions of the IT management for customers. It’s very gutsy, but they do have lots of money to be able to afford the risk, and besides with their background, if anyone can do this, they can. This is humungous business that not only drives big revenues (we’re not sure about the margins yet) but also strategically excludes and locks out competition for a number of years. We have seen some very huge multi year wins by IBM in this new venture and in the last couple of years from BNS worth approximately $1.2 Billion to TD worth about $720 Million, and recently National Bank at about $200 Milllion. But IBM is not the only player in this arena evidenced by the mother of all deals thus far that HP won from CIBC for PC’s and IT governance worth a cool $2.0 Billion.
Outsourcing ventures doesn’t imply that these large service providers have all these capabilities. What it does mean is that they have management experience and some products and skills to ensure delivery of such services.
As a result there will be numerous partnerships created with local/national smaller non-threatening partners to deliver certain portions of the agreement from low cost break-fix on site services which has no margin or low interest for IBM, to low labor cost feet on the street to do calls, installs and projects etc. So there will still be opportunities for break-fix, but the large companies may not necessarily want to handle them directly. They just want to control and manage them. They’re in the game for the bigger picture of long term account ownership and total solution sales and will at times if necessary to achieve that goal buy the multi vendor service business even at a loss.
So what’s next?
For break-fix service providers, you could continue milking the base and as it erodes before your eyes. You can continue kissing a thousand frogs before one turns into a prince. You can cut more cost in the struggle to survive. You can chase a lucrative subcontract service partner opportunity with one of the major outsourcing service corporations. But, don’t let these be your only strategies. If you are staying in the break-fix business, you’d better be the best at it. I mean the very best so that customers take notice. Find either a niche or well mastered differentiator that will take your competitors a long time to catch on and catch up and believe it or not there are still some untapped good ones left. It’s the well defined differentiators, well executed strategies and the retention of knowledgeable skilled people that makes the winning formula. Remember also that customers will pay a premium for high quality service. Did you know that just a few years ago, two of the major banks in Canada were presented with a service rate increase of 20 per cent per year against multi million dollars and multi year contracts with one of their suppliers and they accepted it with little or no fuss?
But what could the next step beyond outsourcing be? Will these large companies outsourcing their services lose control of some critical pieces of their business? Will there be some yet unidentified risk in these outsourcing arrangements? Can a major disaster or security breach take place that can change this direction? Will they realize that if the outsourcing services provider can make a decent margin at managing the services for them and that their subcontracted partners in turn are also making margin with their portion, that they would reconsider and do it directly again? Will they fear losing that expertise and direct control over outsourced services? Will they realize that the decrease in headcount when services are outsourced in order to increase revenue per employee and in turn positively impact stock prices may prove to be a short term strategy? Will North America become a ghost town of businesses as more and more services and jobs are outsorced/transferred to remote places like Mexico, India and China? Food for thought, don’t you think?
Dom Constantini has more than 25 years of experience in the customer service industry with many accomplishments in various capacities from sales, marketing and service operations. He started his career as a technician for Xerox and progressed to become the co-founder and national operations manager of the Xerox Service Centres. Constantini worked for Honeywell Information Systems/Bull Information Systems as national marketing manager and express catalogue sales director. He also worked for NCR as director customer service, central region operations. Most recently he has become senior vice president sales, marketing and operations for RBA Computer Experts Inc. You can reach him at Worldclass Customer Service Consulting Domcostantini@eyesurf.net.