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Ouch! Getting the profit/cost centre call wrong in your service business.

Dec 6 • Features, Management • 3065 Views • Comments Off on Ouch! Getting the profit/cost centre call wrong in your service business.

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It can make or break your service business growth strategy, yet it’s surprising how many service leaders do not appreciate the impact a separate service P&L can have on changing the mind-set of their people.

Many just focus on what they believe is the best way to maximise their corporate value. Yes it’s important to ensure we have the systems to manage the value of our enterprise, but we also need to consider the impact of measures on the performance of our people.

Take Textron Fastening Systems who were a $1.8bn global manufacturer of nuts, bolts, rivets, screws and plastic clips. Their European business became the sole supplier of fasteners to the Ford Fiesta, providing an integrated solution consisting of manufacturing, purchasing, logistics and engineering services. As far from their manufacturing core, it was set up with it’s own P&L and dedicated team. They succeeded due to their focus and separation from the main manufacturing business.

But once this $30million service business was stable, we decided to re-integrate it back into the core business. So a dedicated team, was re-deployed back into the operational silo’s of Engineering, Logistics, Purchasing , IT and Sales. What a disaster and I say that as this case study is from my own experiences. We lost focus, drive, energy and sales. Our biggest competitor, who set up a separate service business, grew to 5 times our revenue, from exactly the same starting point in time and experience. 15 years on the Textron Fastening Systems no longer exists, having been bought by Private Equity and then broken up. Ironically the remains of the service business have survived but without growth.

For me this was a very salutatory lesson about the importance of focus. But its not so simple as saying that for an industrial company to succeed you must have a separate P&L or Business Unit.

It depends on the strategic goals of the business and also where it is in the transformation process. For example companies such as Rolls Royce & BAE with over 50% of their revenues from services see it as such an integral part of their business model, they do not have a stand alone services division.

So if you are pondering how best to manage your corporate value and looking to make the profit/cost centre call, you might ask yourself 2 questions:

  1. In your future business model how integrated will be your products and services offering.
  2. Is organisational focus the key challenge facing your service transformation programme.

Having a sound service strategy is key to make the transformation to a sustainable high growth profitable service business. If you want to read  more about how real companies achieve this goal, you can look at the Bobst case study on www.noventum.eu

Read part one of this series, Creating value through services: Where to Start? here  

Read Part Three of this series, Finding nuggets of customer gold here

 

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