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Increasing competition and complexity of product selling put firms under pressure to add value, so many firms are moving towards delivering service solutions and outcomes. Traditional manufacturing companies are often strong with risk-management process on the product side, however they fail to grasp the complexity associated with managing risk on the service side, here Dr. Shaun West and Victoria Paytova of Lucerne University offer their insight into these challenges. 

 When a supplier decides to provide more than just product-related services it has to consider risk over the whole product life-cycle because the risk is no longer just a “warranty”.

Traditional manufacturing companies are often strong with risk-management process on the product side, however they fail to grasp the complexity associated with managing risk on the service side. Based on the interviews with fourteen companies operating globally and domestically in different fields: from power generation to food industry, this paper introduces their insights on risk awareness and evaluation in services.

Some companies produce high capital goods and services constitute the part of the product-service portfolio; others offer purely services; their annual revenues vary from millions to billions. Another aspect is that some of those are pioneers in service provision rather than others already have long experience in the service business. So, we can classify them by the percentage of service sales: three companies with service sales up to 25%, five companies indicate service sales between 25 and 40%, and four firms provide purely services (100%); also, two respondents present opinion on risk from the customer perspective.

Industrial feedback on risk in services revealed that service providers neither recognise risk as a competitive advantage nor actively implement risk management practices into service offer creation. This white paper provides guidance on how to understand and manage risk to create competitive advantage in a product service system environment.

Risks From An Asset Life-Cycle Perspective
Risk should be initially considered on an asset life-cycle perspective. (See Figure 1.)



Today a well-documented example is the Rolls-Royce Trent engine, the turbines of which fail to meet the operational performance due to poor design. The deterioration of turbine blades inside Rolls-Royce jet engines has required constant monitoring of the engines, urgent maintenance and repairs through 2022.

The problems have caused serious disruption to airlines — and they are proving costly to the engine-maker. Rolls-Royce reported an accounting charge of $315 million to cover ongoing repairs to two models of its jet engines it has supplied for more than 200 aircraft as well as compensation to airlines for planes taken out of service for the engine retrofits.

Which confirms the fact that issues at early stages cause significant risks and endanger not only product performance but also the reputation and financial stability of the service provider.

Service offering and embedded risks
In order to see what particular services industrial companies offer we analysed 14 firms. The analysis confirmed that in general there was risk transfer from the basic services to the more advanced services. A variety of services can be built-up in product-service portfolios depending on company’s ability and readiness to deliver good service, risk acceptance, as well as the type of relationships service provider wants to establish with a customer.

The analysis also showed that they provided three different levels of service: product services, operations support services, life cycle and asset support services. The typical services in each level are shown in Table 1 (below) and have been categories based on the service level.



I. Product services – represent services which are closely associated with a product or to help the customer to gain access to it, often mostly associated with the maintenance of the equipment.

II. Operations support services – represent services that support the operation of the equipment provided.

III. Life-cycle/asset support services – support the product over its life; they are designed to ensure good asset performance and to help to improve performance based on new technologies and market requirements. When building a portfolio of products and services, companies should consider risks over the product life no matter whether it is basic or advanced service
agreement.

The execution risks will continue to repeat unless effective control and improvement measures are put in place. The statistical information on the failure rates will support the understanding of the commercial risks ensuring that they reduce the negative impact.

Finally, if it is not tracked, how do you know where the problem is, the root cause and how to best solve it in future products?

Execution and Commercial risks
This white paper breaks risks into two closely related categories, the first is execution risk and the second is a commercial risk. Execution risk is the additional cost that the firm has due to execution failures and closely associated with service delivery, includes internal and external quality problems, late completion, or post service failures due.

For example, the late delivery of a small consumable item can mean that inspection work on the machine cannot be completed on time. This can then trigger commercial risk to come to play which could be many times larger than the cost of the consumable item.
The commercial risk can be made by the supplier at the contracting stage, such as unsuitable contract decisions, typically firms overpromise performance (delivery, availability etc.), or have unsuitable agreements for services. These are often related to the execution risk (e.g., late delivery) and can be significantly higher in value (e.g., liquidated damages resulting from the late delivery).

This is shown graphically in Figure 2 (below) where the supplier’s liquidated damages never cover the customer’s risk fully, this is because the customer’s business risk is typically orders of magnitude greater than those of the supplier.


Therefore, the customer needs to either self-insure and to buy insurance to cover their full consequential and business interruption costs. The supplier should always consider the full impact it can have on customer’s business because the liquidated damages will likely only cover a part of the customer’s losses.

The use of risk/reward-type performance commitments should incentivise the supplier to achieve the right outcome for their customer, it is not a replacement for insurance.

Understanding Risks
At each stage from the beginning, different risks may unstable internal processes, increase the time to the market and affect future performance of the product. For example, poor reliability of a part decreases the overall reliability of the product, consequently, the supplier under a basic after-market service holds minimum risk and only responsible for the replacement of the first failing part under warranty.

Under an advanced service agreement (performance/output-base) the supplier is responsible for removing and replacing the part as well as paying the liquidated damages for poor performance due to machine downtime because its customer has a revenue loss.
So, the supplier is not only exposed to execution risk but also to significant commercial risk: it has to pay the liquidated damages meaning customer is partly compensated for the loss of performance. Interviews confirmed that risks rise both at the service contracting stage and at the delivery stage, so they refer to commercial risk and operational (execution) risk.

It is common for manufacturing firms to have well defined contracts for new equipment sales whereas service contracts may be less appropriate for the service environment, being more applicable to the sale of basic rather than advanced services.
It is very challenging for contract or project managers identify and measure potential risks and create sort of standardised approach for risk assessment.

Their role is to determine the risks that customers expect them to take with service contracts as well as evaluate the critical risks that they finally accept. The deep understanding of the customer, awareness of your capabilities can decrease the lack of information and associated counterparty risks.

The supplier can actually create competitive advantage by building an active model for risk management. Understanding the risk implies that service provider can identify and measure the risk it transfers from the customer.

Calculating the Value at Risk
Only knowing the possibility of risk appearance does not solve the problem, more important is to know the frequency of events, its execution and commercial impact. Digitalization can help here in the form of data analysis of performance (e.g., lead times, number of failed starts, output), so the firm should create a database that allows the supplier to model and predict risks. By collecting and analysing data on product design or manufacturing issues, failure rates and time (logistics or maintenance completion), the supplier also knows what must be changed or improved as well as understanding the cost of mitigation. Statistical analysis helps service providers to understand better their capabilities and to control risks.


The Value at Risk (VaR) concept is defined as an expected maximum loss of the risk position and it is widely applied in the finance industry. For example, we take the planned maintenance and the issue would be late delivery of parts which was promised at 26 days.

From the past (data analysis), we have to find out what is our actual lead time and deviation from the ‘expected’ lead time. Form this we can calculate the expected execution cost and predict the commercial impact based on the lead time.

The total risk is the position valued at current prices, in our case is the total execution and commercial, from which we can define the expected maximum loss.

The higher the chosen confidence level is, the higher the potential maximum loss. From these principles and calculations results drawn from the concept, the VaR of individual risk position can be derived.

This analysis will help the supplier to decide on what delivery terms, performance commitments or other KPIs they can provide as well as calculate the commercial value of the contract with particular services.

Answers to these questions also will tell what liquidated damages to expect for availability, reliability, efficiency and late delivery if supplier choses terms that do not correspond to statistical analysis.

Pricing the risk
Now that we understand the value at risk, it is important to price the risk. This is because you are taking risk from the customer and you are therefore providing a valuable service for them. How can this additional service be priced? First, the price should be above the cost otherwise you are not getting a reward for taking the risk! Questions to ask yourself when estimating the ‘fairprice’ to charge:

• What are the customers critical performance measures or outcomes?
• How much would it cost the customer to take the risk themselves?
• How much pain are you really taking from the customer?
• Is the gain/pain sharing balanced?
• What do you think is their ‘willingness-to-pay’?

Do not accept to hold a risk where they cannot control or mitigate the risk, taking market risks is not a sure-fire way to go out of business. Finding a balance with the risks so that you are incentivised to improve performance and outcome for the customer is nevertheless difficult but something worth doing.

Learn from past experiences, the RR example with the Trent engine was predictable as were the costs. Recommendations Firms should consider how they assess risk for product service systems, this is practically important for advanced services. It is recommended to measure execution and commercial risks for every project.

Learning to track the events that cause both execution and commercial risks will help you to better understand the risks and the costs associated with them.

By being more proactive in risk management, industrial firms can turn the risk into commercial advantage.

As we conclude our series of excerpts from the exceptional industry guide 'Mobile Resource Management for Dummies', which has been commissioned by Verizon Connect we bring you ten benefits Mobile Resource Management (MRM) can bring to your business.

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If you have missed any of the other excerpts within this series you can catch up on the other topics we've explored which include: Understanding Digital Transformation in a Connected, Mobile World  also Thinking Outside the Silo and Harnessing the Power of Telematics,  Realising the Value of Mobile Resource Management and Avoiding Mobile Resource Management Pitfalls and Driving Employee Engagement with Gamification

However, the eBook contains a wealth of other key chapters offering important insight for any field service professional and we advise downloading the full eBook on either of the links at the top and bottom of the page...

 

Cloud-based MRM solutions can help your business to achieve numerous benefits: lower fuel costs, improved driver safety, better fleet utilisation, increased worker productivity, proactive maintenance and enhanced customer experience to name a few.

But the benefits to other areas of a company may not be as obvious. A comprehensive MRM solution can deliver benefits to many departments and roles within a company, including increasing return on investment (ROI) and lowering the total cost of ownership (TCO) of mobile assets, improving productivity, increasing business agility and achieving competitive advantage.

By connecting vehicles, mobile assets, people and work, MRM gives the organisation the insight, agility and customer experience to stop lagging behind competitors and lead the market – to not just succeed but thrive.

In this way, MRM can transform the way the organisation does business.

So let's explore a few of the benefits experienced across various areas within the organisation.

 

#1 Operations:

An MRM solution provides operations managers with the tools they need to be able to plan for the day, week, month and year ahead. It gives complete visibility into everything that’s on-the-go so that teams can help to control running costs, streamline operations, optimise current assets and staff, make the most of the customer experience, and ensure compliance with all safety standards and regulatory mandates. It provides the data to help to plan for the future as companies look to grow and advance.

You need a broad platform approach to help automate manual processes, ensure consistency and efficiency throughout all operations and know that it’s all working. You need to be responsive and agile to customer demands. A negative customer experience damages you, your operation and the company as a whole. Organisations all live and die on the efficiency of the operation, and you need to introduce new services quickly and cost-effectively to meet the fast-changing expectations of customers.

 

#2 Fleet Management:

MRM programs can keep fleets in the best shape possible by reducing management and maintenance costs, creating proactive maintenance alerts, and opening a direct connection to maintenance providers. An MRM solution can also help to optimise the way the organisation uses its fleet, with planning tools that help to ensure that the right number and type of mobile resources are assigned to the right jobs, people and vehicles.

 

#3 Information Technology:

Through the use of an MRM solution, IT can access the data it needs to support the optimisation and automation of work and cash flows across the organisation. A cloud-based MRM solution also means fewer systems for IT to maintain, easier integration without the need to create and maintain application programming interfaces (APIs), faster deployment in the cloud, and simpler management of a single platform.

An MRM solution allows the team to enable and secure the collection of operational data from vehicles and drivers, and integrate that data with other applications for complete operations visibility.

 

#4 Making Safety a Priority:

An MRM solution can help businesses to make safety a priority by monitoring mobile resources such as construction tools, cherry pickers, cranes, and other heavy equipment to ensure that they’re being properly operated and maintained.

An MRM solution can also help management to create safer driving behaviours, such as avoiding speeding and harsh braking, through the use of driver scorecards and coaching tools, monitoring seatbelt usage, and providing accident notifications with airbag deployment alerts, along with in-cab alerts and live reporting. It can also help the team to reduce the possibility of accidents by optimising drivers’ routes and cutting out unnecessary travel. Finally, an MRM solution can help drivers with regulatory compliance.

 

#5 Risk Management:

With MRM, risk management teams have the ability to ensure regulatory and policy compliance in vehicles and demonstrate a mobile duty of care.

By identifying unsafe driving behaviour, providing insights into accident or damage claims, mitigating fleet liability risks, and protecting against potential fraud, theft and supervisory negligence claims, businesses can reduce risk due to consequential losses.

In other words, MRM software is the eyes and ears to ensure the on-the-go organisation is running as smoothly as possible, and provides peace of mind for business owners and directors, as MRM insights allow for greater control and measurement of key compliance and safety legislation.

#6 Sales and Customer Relations:

An MRM solution helps to give sales and customer relations one of the very best outcomes possible – more on-time service calls, deliveries and appointments, and better customer estimated time of arrival (ETA) visibility. That, in turn, creates long-term fans and brand advocates who’ll come back again and again.

 

#7 Human Resources:

Human resources can use an enterprise fleet management solution to gain a near real-time connection to all on-the-go employees. Whether it’s visibility, near real-time coaching, training or helping drivers to hit more of their targets by being more efficient, an MRM software solution gives human resources the tools they need to make employees even better.

 

#8 Tax Recordkeeping:

An MRM solution includes driver apps, simplifying the classification of business and personal journeys. This helps to reduce administration time and produces mileage reporting in an HMRC- ready format. MRM solutions can also control routes, helping to avoid road tolls.

 

#9 Payroll:

By making aspects like miles and hours driven, hours on site, and time from clock-in to departure easy to measure, and by moving from paper to electronic timesheets, an MRM solution helps payroll to perform more efficiently.

MRM helps you to better manage wage bills by matching the right skill to the right job, rather than sending overqualified staff to easier, low-level jobs. An MRM solution can also help you to manage labour distribution efficiently so that you can assign jobs to less utilised employees earning standard time, rather than employees earning overtime for a given pay period, when possible. And when payroll is more efficient, salaries and payments go out on time – which makes everybody happy.

 

#10 Finance:

An MRM solution improves cash flow and speeds up billing, by helping the finance department to speed up all payment and processing operations, as well as reduce invoice and settlement disputes. Financial reporting is also faster with easy-to-create and distribute reports that demonstrate savings and productivity throughout the organisation. This is possible because an MRM program can help to automate the entire workflow – moving from paper to digital.

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Zip Water UK has revealed how driving performance data has helped the company manage fleet risk and cut annual insurance costs by more than £30,000.

The drinking water appliance specialist made the savings across its 120-strong mixed fleet following the introduction of WEBFLEET, the Software-as-a-Service fleet management system from TomTom Telematics.

With WEBFLEET – and the integral OptiDrive 360 solution which scores drivers based on key performance indicators and provides them with real-time feedback and advice – Zip Water has witnessed a significant reduction in road traffic collisions.

[quote float="left"]Having the tools in place to promote a safer driving style among our van and car drivers has led to a much-improved fleet risk profile[/quote]“Having the tools in place to promote a safer driving style among our van and car drivers has led to a much-improved fleet risk profile, a 15 per cent reduction in insurance premiums thanks to reduced claims, and a welcome fillip to our employee duty of care,” said Graham Short, Fleet Manager, Zip Water UK.

“Furthermore, we have seen a demonstrable improvement in fleet mpg, along with a sizeable reduction in our vehicle maintenance bills, including tyres and brake wear.”

Zip Water drivers are now also using the WEBFLEET Logbook app on their smartphones to keep accurate journey logs, rather than having to complete manual mileage sheets at the end of each day. The drivers simply validate their journey information and select whether the trips they have made are for business or private purposes.

Short added: “The value and efficiency gains that the telematics system has delivered to our business have been considerable. These have been recognised across our entire workforce – from the field to the back office.”

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Kris Oldland, Editor-in-Chief, Field Service News talks to Deputy CEO and COO of Polygon a company with over 3,500 field service engineers, about how his organisation has evolved over the last decade, the shift towards advanced services that has come from that evolution and how a close working relationship with Enterprise Service Management solution provider IFS has empowered their ability to develop and advanced services approach to field service delivery.

 

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