Value-Added Services in a Self-Service Culture Epicor White Paper Sponsored Research for Distributors Serving MRO/Industrial/Institutional Sectors Value-Added Services in a Self-Service Culture 1 About the Research This project came about as an extension to prior Epicor-sponsored research in 2015 which concerned eCommerce and channel relationships between manufacturer and distributor as relationships become digital. From this research, we found that small- to mid-market distributors were behind in eCommerce, with nearly two-thirds selling less than 5% of their demand online. However, larger firms, especially those over $250 million or more in sales, were growing eCommerce sales, with many firms selling 10% to 20% or more online. However, small- and mid-size distribution firms seemed secure in their existing plans. Many were investing and improving their eCommerce presence, albeit not at a pace similar to their larger competitors. Additionally, they were growing sales despite lagging in eCommerce investment and performance; why and how were they doing this? We gained some clues, from the 2015 research, that the answer was in fee-based services. In short, small- and mid-size distribution firms were securing their growth and digital defense by moving further into the value chain, offering more complex services to their top customers. Given the fact that services, as a subject in distribution, has not been a “hot topic” since before the Great Recession, we decided to investigate with a brand new project. We hope the research proves valuable to your ongoing management efforts. This research project is the result of a collaborative effort between Epicor, Industrial Supply Magazine and Benfield Consulting. Epicor is a major supplier of Enterprise Resource Planning software with eCommerce solutions for the distribution sector and is the research sponsor. Industrial Supply Magazine serves distributors in the MRO/Industrial/Institutional sectors and Benfield Consulting is a Chicago-based firm working with dis-tributors and manufacturers in B2B channels. The research instrument was placed online in the third quarter of 2016. A total of 153 distributor respondents completed the survey. Value-Added Services in a Self-Service Culture 2 Respondent Demographics The size in annual revenues of respondent firms is reviewed in Exhibit 1. In the Exhibit, we find that the revenue ranges are dispersed as follows: X 45.4% of respondents with sales less than $25 million X 13.8% of respondents with sales between $25 million and $50 million X 13.2% of respondents with sales between $50 and $99 million X 11.2% of respondents with sales between $100 million and $249 million X 9.9% of respondents with sales between $250 million to $500 million, and X 6.6% of respondents with sales over $500 million Exhibit 1 Firm Revenues of Respondents From prior research, these revenue ranges are common, as most distribution firms in the industrial and institutional sectors tend to be small. However, consolidation is growing the larger firm size ranges, as 28% of firms are over $100 million in sales. Firms covered a variety of industrial and institutional sectors as depicted in Exhibit 2. This represents the breadth and diversity of industries, institutions, and applications of the combined $700 billion in sales sectors in North America. In Exhibit 2, multiple responses find that firms are strong in Industrial and far above other sectors with a strong showing of 87.5%. However, for each 10% response there are 15 firms serving the sector. Hence, non-traditional sectors including packaging and health-care were 27 or more responses which qualifies for a statistically valid sample. Somewhat surprising was the showing of construction (43%) as a top response, however, there has been through consolidation a mixing of firms in construction sectors (PVF, Electrical, HVAC, etc.) with more traditional sectors of MRO/Industrial. Exhibit 2 Respondents by job title and function are important. The greater the responses in Executive and Management functions, the more predictive the survey. These positions control much of the firm’s expenditures and set strategic direction. In Exhibit 3, the Executive respondents represent 45% of the sample and, when added to Management, the total responses comprise 70% of the entire sample. Hence, the predictive value of the survey is high, as seven out of 10 positions are Executive or Management. Exhibit 3 Respondents by Function Service Revenues and Current Practice A question that has often curiously eluded prior research on services is how much do fee-based services comprise the typical distributor? The answer varies by size of distributor, however, the research finds that a weighted average of 12% of all revenues come from fee-based services and, furthermore, this is expected to grow. Exhibit 4 offers a view of service revenues for respondents and, surprisingly, some distributors derive a substantial part (> 25%) of their revenues from feebased services. From the Exhibit, the distribution of firmsand their fee-based revenues are: X 20% of firms have less than 5% of their sales represented by services X 19% of firms have between 6% and 10% of their sales represented by services X 31% of firms have between 11% and 25% of their sales represented by services X 12% of firms have between 26% and 50% of their sale represented by services Industrial Industrial Sector Response Percent Responses by Sector (Multiple responses) 87.5% 43.4% 33.6% 25.7% 23.0% 22.4% 20.4% 18.4% 17.8% Construction Fasteners Fluid Power Petroleum Janitorial Other Packaging/Paper Health Care 45.4% 13.8% 13.2% 9.9% 9.9% 6.6% Less than $25 million $25 million to $50 million $50 million to $99 million $100 million to $249 million $250 million to $500 million Over $500 million Less than $25 million $25 million to $50 million $50 million to $99 million $100 million to $249 million $250 million to $500 million Over $500 million The forward investment attitude of services is important to understand. Is the practice of fee-based services an area that distributors will invest in? Owner/Executive Management Operations IT Sales Finance/Accounting 24% 45% 2% 1% 3% 25% Owner/Executive Management Operations IT Sales Finance/Accounting Value-Added Services in a Self-Service 3 Exhibit 4 Service Fees as Percent of Overall Sales Revenue The answer to the question found that services were financially attractive because: X Customers who purchase services purchase a wider range of products (27%) X Customers who purchase services are less likely to switch suppliers (23%) X Services are less price sensitive than products (23%) X Services have higher gross margins than products (17%) X Vendors invest in services as it helps their product sales (10%) Exhibit 5 Future Service Investment Nearly 40% of respondents replied they are planning to grow service revenues, with 18% responding service revenues would remain flat. Interestingly, no respondents selected that service revenues would decrease. In short, there are a variety of reasons distributors find fee-based services attractive and a fertile ground for future investment. Top reasons for investment include increase in breadth of products purchased and increased loyalty from customers who purchase services. Service Investment To recap, distributors currently sell 12% of demand in fee-based services, and investment in services is expected to increase, with 40% of firms expecting services revenues to grow. It is important to note, our service research is primarily interested in services that generate revenue. In the basic distribution services platform, initially, distribution firms did not develop products. However, the existing services provided by distributors are mostly mature and the basic service platform is well-documented and offers little room for differentiation. Hence distributors, to differentiate their firm, need to consistently deliver quality services their customers want to buy. This requires understanding of future services to invest in and how to deliver them consistently while reducing error and cost. When evaluating services, distributors have a variety of hard and soft measures to consider. Exhibit 6 lists priorities that distributors use to evaluate whether a service is worthy of investment. The top four investment criteria are exceptionally close and include the unique value of the service (23%), service profitability (22%), infrastructure support/people to staff the service (22%), and fit in the firm’s growth strategy (21%). Another 10% selected the ability of the ERP system to track, invoice and manage the service. Exhibit 6 Criteria for Service Investment Types of services for future investment were reviewed. The table in Exhibit 7 ranks, in descending order, the types of services that wholesalers expect to invest in for both non- fee based and fee-based services. We offered the non-fee based category to understand if there were service categories that managers felt warranted investment. In Exhibit 7, these categories are listed including no-charge services of consultative sales and inventory management. These services are part of the fabric of distributors in the Industrial/ MRO/Institutional sectors and it is difficult to be a distributor without offering them. We stress the word mature including the observations that these services become expected by customers but the ability to charge for them, separately, diminishes as their offering becomes common. It is important for distributor managers to consider if nocharge services are overdone in their investment and sap the potential of fee-based offerings. By definition, most fee-based services are not mature, hence, they are typically not offered by the majority of distributors. In the past, as services gained maturity, they moved from a fee basis to a no-charge basis. This is changing, however, and is due to capital and IT investment in the new category of services. Often, services such as preventive maintenance, assembly Less than 5% of sales 6% to 10% of sales 11% to 25% of sales 26% to 50% of sales Does not apply/Don’t know 19% 20% 31% 12% 18% Less than 5% of sales 6% to 10% of sales 11% to 25% of sales 26% to 50% of sales Does not apply/Don’t know Grow service revenues Service revenues remain flat Service revenues will decrease Service revenues increase loyalty No response 0% 14% 39% 18% 29% Grow service revenues Service revenues remain flat Service revenues will decrease Service revenues increase loyalty No response Service profitiability Infrastructure support/People ERP system to track, manage, invoice Fit in growth strategy Unique value of service Ability to transact online 2% 22% 22% 10% 21% 23% Service profitiability Infrastructure support/People ERP system to rack, man ge, invoice Fit in growth stra egy Unique value of service Ability o ransact onli e Additionally, we asked about the appetite for future service investment, with the results in Exhibit 5. Value-Added Services in a Self-Service 4 Exhibit 8 gives the results from the survey regarding a new service development process. In the Exhibit, we find 50% of respondents had no answer to the question for having a formal NSD process. The response offerings of Does Not Apply/Don’t Know lead to the overall conclusion that many distributors don’t use a formal service development process. The overriding question is, does a formal NSD process make a tangible difference in financial performance? In Exhibit 8, we compared service revenues for firms who answered “Yes, for most services,” versus those who answered “For some services. . .” or “For a few services.” The findings were eye-opening. Firms that regularly use a NSD process generate 47% of their revenues in services versus 25% of revenues in services for intermittent uses of a NSD process. Additionally, for firms that responded “Does not apply/Do not know,” we find 86% have service revenues less than the weighted average of fee-based revenues of 12% of total sales. Exhibit 8 Does your firm have a formal new service development process? (Please choose one) There are two primary types of NSD processes: Agile and Stage-Gate. Both processes come from new product and new service and kitting, and light manufacturing require significant investment in IT, plant, property and equipment. These investments require a profit and loss structure where management can clearly see if the service is of enough value to offer a positive return, hence a fee basis is preferred. Too often, we find where management creates services in hopes they will grow product sales or increase customer loyalty. But the clear indication of these investment goals is difficult to measure; product volume and competitors falling away can occur for many reasons. It is our belief that future service development will be more of the fee-basis type. It is the best means to gauge if the service has enough value to the customer to offer a positive return. Exhibit 7 Developing the New Service New Service Development is a topic that has received lukewarm reception among distributors. The reasons for this are, largely, the fact that distribution, heretofore, has been a sales driven structure; the emphasis is directed at personal influence of the individual. The more successful firms in service development have dedicated marketing management or support from executive management to invest in new services. In smaller firms, where fee-based services often represent a higher percentage of sales than large firms, executive management serves as marketing management to successfully develop and launch the service. We asked about a formal service development process to manage new service offerings. New Service Development (NSD) comes, largely, from new product development in manufacturing. The exception is that, once the new service is developed, it is nearer to launch than a product. Unlike products, there are few service prototypes that can be test-marketed development in, typically, larger corporations but we have used them in distribution companies successfully. We describe the more common process of Stage Gate in Exhibit 9. Exhibit 9 New Service Development Process- Stage Gate Method In Exhibit 9, the Stage Gate process has eight stages with total costs of $159,000 to $345,000 to successfully launch six fee-based services. These costs are, mostly, not incremental to the distribution firm but represent funds diverted to support new service development. The overall process represents a funnel where, at each stage of the process, the number of potential services is winnowed down until six are launched and deemed successful. Each stage has unique characteristics which are outside the scope of this report to explain in detail. However, there is plenty of literature available on the Stage Gate process and we recommend further research if there is interest. In one area of the NSD process, however, we researched where distributors get ideas for successful services. Exhibit 10 provides a list (multiple responses) of areas where distributors gather new service ideas. Customers top the list, followed by competitors, employees, vendors, non-direct competitors and acquisitions. Surprising to many is the inclusion and reasonably selected category of vendors for new service development. Our work in services for distributors finds, however, that an increasing amount of vendors are interested in working Consultative sales for product application (No charge) Inventory management services on-site (No charge) Preventive maintenance of field repair for free Assembly and kitting on a fee basis Light manufacturing on a fee basis Service Type Percentage ERP System and Service Management (Multiple responses) 76.7% 62.8% 47.7% 41.9% 26.7% Consultative service on a fee basis 24.4% Programming or IT service (No charge and fee basis) 17.4% Yes for most services For some services but not others For a few services Does not apply/Don’t know 16.3% 50% 17.3% 16.3% Yes for most services For some s rvices but not thers For a few services Does not apply/Don’t know Value-Added Services in a Self-Service Culture 5 with distributors on services that help sell their products. Finally, we offer a caveat about relying on competitors for new service ideas (62.5% of respondents). Should the service in consideration be offered by numerous competitors, it may be a good idea to pass it up. Exhibit 10 The role of ERP technology in Services As distributors move further into their customers’ value chain, they develop more unique services. These services often require substantial investments for capital equipment, manufacturing space, and IT programs. ERP software has an increasingly valuable role to play in service development for distributors, and the research pointed to several areas where progressive software vendors are offering needed functionality. In Exhibit 11, we asked about ERP systems and their ability to track and manage specific types of services. The responses were strong in site inventory management, as many firms offer inventory management service in bin stocking, VMI, and integrated supply forms. Surprisingly, we found many distributors wanting to integrate their services with their eCommerce transaction software. In post-survey conversations, distributors that are strong in fee-based sales wish to migrate more mature services online. This relieves customer service, inside sales, and accounting personnel, as customers can self-serve for service ordering and tracking. The three least responses for ERP system capabilities and services netted one-quarter of the respondents. These included tracking and management of light manufacturing, post-sale technician service, and consulting services. The need for the ERP system to move into further service functionality is ongoing and crucial to distributors getting cost out of the service by linking it to eCommerce and financially tracking service costs to make sure they are providing a satisfactory return. Unlike buy/sell products, services have considerable labor and asset components to support their ongoing provision. These costs, often, use manufacturing cost accounting or track unique labor costs not associated with typical box in/box out distribution. We expect further development of ERP systems and as it relates to an increasing variety of services provided by distributors. Exhibit 11 Summation Distributors have provided services to customers as their products and basic service platform became commoditized and delivered reduced profits. As eCommerce emerged in the late 1990s, distributors have pushed further into the value chain of their customers to offset the competitive threat of online technology. The forces of maturation of products and the online threat of larger distributors is ongoing and will further force small- and mid-size distribution firms to develop unique services. Future services will require a tested NSD process, marketing personnel and/or processes to price, develop, and promote new services, and ERP systems that can successfully track service provision and costs. Today, distributors under $100 million in annual sales have a higher percent of service sales than their larger sales brethren. We expect larger distributors, however, to increase Customers Service Ideas Percentage New Service Ideas (Multiple responses) 87.5% 43.4% 33.6% 25.7% 23.0% 20.4% Competitiors Employees Vendors Distributors that are not direct competitors Aquisitions Success Rate Typical Internal CostsService Funnel 200 Go In 48 Financially valid ideas 24 Pilot 12 Launch 6 Succeed $15,000 - $60,000 Idea Generation Concept Development & Testing Business & Financial Analysis Communication & Strategy Development Test Market Service Launch Post launch support Successful Service Product $8,000 - $15,000 $40,000 - $80,000 $60,000 - $120,000 $36,000 - $70,000 $159,000 - $345,000 Tracking and management of offsite inventory Integration of e-commerce into our service portfolio Tracking and management of kitting and assembly Light manufacturing and tracking of direct costs Tracking and management of consulting services and fees Tracking and management of post-sale PM and site hours Service Type Percentage ERP System and Service Management (Multiple responses) 64.1% 40.6% 39.1% 25.0% 25.0% 23.4% About Epicor Epicor Software Corporation drives business growth. We provide flexible, industry-specific software that is designed around the needs of our manufacturing, distribution, retail, and service industry customers. More than 40 years of experience with our customers’ unique business processes and operational requirements is built into every solution—in the cloud or on premises. With a deep understanding of your industry, Epicor solutions spur growth while managing complexity. The result is powerful solutions that free your resources so you can grow your business. For more information, connect with Epicor or visit www.epicor.com. Contact us for more information on Epicor products and services +1.800.999.6995 email@example.com www.epicor.com The contents of this document are for informational purposes only and are subject to change without notice. Epicor Software Corporation makes no guarantee, representations, or warranties with regard to the enclosed information and specifically disclaims, to the full extent of the law, any applicable implied warranties, such as fitness for a particular purpose, merchantability, satisfactory quality, or reasonable skill and care. This document and its contents, including the viewpoints, dates, and functional content expressed herein are believed to be accurate as of its date of publication, November 2017. The results represented in this testimonial may be unique to the particular user as each user’s experience will vary. The usage of any Epicor software shall be pursuant to the applicable end user license agreement, and the performance of any consulting services by Epicor personnel shall be pursuant to applicable standard services terms and conditions. Usage of the solution(s) described in this document with other Epicor software or third-party products may require the purchase of licenses for such other products. Epicor and the Epicor logo are registered trademarks or trademarks of Epicor Software Corporation in the United States, certain other countries and/or the EU. All other trademarks mentioned are the property of their respective owners. Copyright © 2017 Epicor Software Corporation. All rights reserved. Value-Added Services in a Self-Service their new service development or openly acquire firms with unique service offerings in hopes of spreading them to a large customer base. Too, larger firms can fund the investments in ERP software to manage services and link them to the eCommerce site. The services of tomorrow will require the best systems, strategic management, and marketing processes available. Distributors will need service profits to offset the commoditization of the box in/box out platform. About Scott Benfield The research and analyses are done by Benfield Consulting of Chicago and cannot be copied, in part or in whole, without permission of Benfield Consulting. Scott Benfield is a Chicago-based consultant for B2B channels. He has been quoted in Forbes and the Financial Times and is the author of six books on B2B channels. He can be reached at Scott@BenfieldConsulting.com and his site is www.benfieldconsulting.com.