Part One of this series went into depth on contract profitability, the first of two metrics I recommend all medical device manufacturers prioritize. This article takes a closer look at the second metric, cost to serve.
What Are the Benefits of Understanding Your Cost to Serve?
Why is cost-to-serve such an important metric to be able to measure? Imagine a manufacturer producing a device that eventually begins to cost more to support than the revenue being pulled in. This is a simple example, but it is a risk that all manufacturers face, and it is where their service organizations tend to catch the brunt of those costs. Service leaders must understand the cost to service by product and by subcomponent to identify which service events are the most impactful to the bottom-line financials of the business.
Gaining visibility into cost-to-serve allows a manufacturer to be proactive in detecting risks and quality trends that may increase the cost to support. Those risks or quality trends may also hurt customer satisfaction, decreasing both sales and market share over time.
The insights provided by looking at cost to serve impacts the medical device company’s entire business:
- R&D and manufacturing departments can leverage the data to launch root cause analysis projects and, ultimately, campaigns to correct the error in the form of redesign, field modifications and upgrades, and even future product design changes.
- Sales and service can use cost of service data to better manage product life cycle, including triggering end of life (EOL) and end of service life (EOSL) timelines to manage costs, customer satisfaction and maintain or grow market share.
- Marketing can launch campaigns to offer upgrades of products to pull aging equipment out and install next generation products within the install base. This will allow not only the ability to maintain share, but also drive incremental growth for the business.
While this analysis helps the manufacturer, it also helps the customer. Customers care if maintenance costs increase or become more complex as that can translate into more downtime and less availability of their machines, as well as an increase in cost-of-service contracts or spare parts.
From the manufacturer’s perspective, these actions will solidify the organization’s hold on share, create incremental growth channels for sales, and improve margins for the service business. In some cases, if a customer insists on holding onto an EOL system that was costly to support, the data allows the service business to more strategically price contracts on that equipment to either cover the costs appropriately or push their customers into upgrading the product by creating an unattractive cost of ownership that incentivizes customers to upgrade their product.
Why Has Cost to Serve Been a Challenge?
The impact that cost-to-serve data can have on a business is huge, so why do some companies fail to track it? Why is it so difficult to get this data? Many companies, either through acquisitions or time, have a fragmented ecosystem of multiple ERP and CRM platforms, along with multiple middleware layers, and even manual measures. This makes is extremely difficult and highly time consuming to perform a cost-to-serve analysis.
Even with the data a manufacturer may be able to pull, more than likely they will not get a true line of sight into all costs, accurate costs, or costs down to multiple levels of components within the asset. It is also necessary to get a mutual understanding across the business in what the definition of cost is and what should be included. These conversations should occur between finance, service, manufacturing, sales and supply chain. Historically, cost data resides in the ERP, while customer-facing teams primarily leverage the operational CRM or service solution. The lack of a single source of truth for both has severely limited all organizations’ ability to truly understand customer service margin.
Service organizations can implement the right technology to bring their data into a single ecosystem and investigate the cost to service in correlation with customer, installed base and product data. Doing so allows meaningful analysis on the drivers of both revenue and cost associated with each asset. The power of having the required data to perform a true cost-to-service improves the speed to report, the ability to report real time, and keeps access of the data at the ready. Businesses are always more flexible to react to cost drivers when they can see the train coming versus after it has gone. A business should be agile as much as possible, but this is difficult if it is in reactive mode. Having real-time availability allows the manufacturer to be proactive, agile and nimble.
Another benefit to having a leaned-out ecosystem is the ability to share data across the horizontal of the business. Many times a business is segmented into silos and all have their own technology platforms to run their piece of the business. There is a significant draw back to this, especially now. Siloed organizational structures are a thing of the past, especially today when companies are trying to do so much with the mountains of data on which they sit. Unified outcomes cannot be leveraged if done in vertical silos. You can never truly unleash the power of the data you are collecting if your view of that data is verticalized. Threading your data horizontally throughout the organization will allow for constructive conversations to begin and holistic decisions to be made. No longer will one part of the business be in the dark or be on the receiving end of a decision or lack of a decision that was done in a different part of the business.
Today is all about the customer experience, which involves every touch point that a customer has with the horizontal of a business, not just one component of that business. The ability for a business to make decisions that impacts their customers using data that is shared horizontally is a business that will win.