Service Contract Analytics: A Roadmap for OEMs

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1 ANALYTICS Service Contract Analytics: A Roadmap for OEMs Genpact The pressure to offer generous warranties and support has been severely eroding Original Equipment Manufacturer (OEM) profits generated from competitive product sales. The same is true for the growing number of maintenance and repair organizations (MROs) that contract to take over the service and repair work from OEMs, often at very low margins. Our research shows that, unlike product revenues, service revenue and related profit is often not scrutinized with the same level of rigor and is not given a comparable set of resources. Limited data availability and analytics affect critical activities, such as contract pricing, product-failure forecasting, and risk management. At Genpact, working with large blue-chip clients for more than a decade, helping clients manage more than US$30 billion worth of service contracts annually, we have found that OEMs and MRO service providers in the U.S., on average, leave up to percent of service revenues on the table and lose up to percent of profits every year as a result of suboptimal sales, marketing, and operations decisions. These inefficiencies cost companies in many ways. For the original equipment manufacturers (OEMs), a weak service organization not only can steal resources from the core business it can cause customer loyalty to erode. For the maintenance service providers, an inconsistent approach to bidding can result in inconsistent win rates, while inaccurate forecasts of product failures can cause these independent contractors to underestimate the real cost of managing maintenance and repair contracts. Inefficiencies in billing, collections, compliance, and operations can lead to additional revenue loss. On the other hand, companies that excel in their post-sales service operations enjoy a significant competitive advantage over those who don t. Fortunately for these companies, analytics solutions can help maximize profits through the full life of the products they sell and similarly for MSPs for the products they service. Introduction For many companies, the tasks of servicing, repairing, and replacing the products they produced were long treated as a necessary cost center to maintain customer loyalty. And while more companies moved to outsource these functions to independent contractors known as maintenance service providers (MSPs), the goal for many executives was to simply minimize losses. But companies realize that they can no longer afford to treat repair, maintenance, returns, and other field-based services as an afterthought. A survey by the same analyst found that

2 According to a leading analyst, post-sales service now accounts for percent of revenue for many industrial and service companies, and up to 50 percent of their inventory investment. As a result, service contract management is taking on a new strategic focus within many companies. 61 percent of companies polled said that aftermarket services were now a strategic operation with revenue and profit goals in place. Another 17 percent of companies indicated they intend to increase their emphasis on service. This newfound service focus among OEMs is partly driven by the customers themselves, who now demand more attention than ever. But it also reflects the recognition among many companies that aftermarket services are one of the few remaining sources of operational efficiencies and revenue growth. Indeed, many OEM executives now believe that optimizing service-management functions can turn these cost centers into new sources of profit. Still, these companies are learning that optimizing service operations requires skills that, for some, are outside their core competencies. For instance, while these companies are technically proficient in their core businesses, they lack the ability and insights to negotiate long-term contracts just as these commitments have become more complex than ever before. According to Goldman Sachs research analyst Jamie Friedman, Fortune 1000 companies today manage an average of 20,000-40,000 contracts. These blue-chip companies spend an average of about 0.5 percent of their revenue just to manage these contracts an expense that could be reduced by as much as half through the use of contract-management solutions. But for most companies, the skills they need to develop extend well beyond negotiating the contract. For OEMs and MSPs, that means excelling in four facets of service-contract management: Managing contract sales and pricing - The biggest step that OEMs can take to make service operations more profitable is to identify customers that offer the best profit potential. This requires better market analyses and better management of sales campaigns, including: Ranking prospective customers by revenue and growth potential Focusing the sales force and sales efforts around proper channels Conducting retrospective analyses of lost contract opportunities Also to determine the optimum pricing for a service contract, companies must be able to reliably forecast the future costs of inputs, such as commodity prices as well as the likelihood of various risks. This includes: Conducting reliability analyses to forecast such risks as equipment failure Developing risk-based pricing and mitigation strategies Developing true cost-of-service estimates Developing and setting up contracts - After the customers have been identified and the negotiations have commenced, companies will benefit from having a script they can follow to ensure that there are no oversights or costly mistakes that can lead to unexpected liabilities or leakages in projected revenues or profits. Companies that excel in this area are those that conduct: Effective service planning and scheduling Formal compliance reviews Systematic analyses of all of the terms and conditions Reviewing contract profitability - Current economic uncertainties and ongoing advances in technology make managing long-term contracts more difficult than ever. Sustaining the profitability of a contract over its full life requires constant vigilance to find opportunities to both increase revenues and cut costs. This requires companies to: Monitor profitability in real time Develop service-optimization strategies Implement productivity enhancements Maintain compliance with all regulatory requirements Handling contract portfolio risk - For an OEM to rely on a single service contract would clearly be risky. But diversifying across 500 contracts would be no less risky if they carry the same risk factors. To truly measure the full spectrum of technical, operational, and financial risks, it requires the ability to analyze the full range of the client portfolio. This requires the ability to: Measure each of the different elements of portfolio risks Manage its receivables and past-due accounts Assign credit limits and payment terms Service contract analytics can help achieve 5-7% improvement in win rate through structured opportunity qualification, optimal pricing leveraging reliability based failure forecasting, and feedback through win-loss analysis 8-10% improvement in service revenues through strong T&Cs compliance to avoid missed billing opportunities and enhanced understanding of contract risk 10%-15% improvement in profitability by driving productivity; identified through analyzing historical cost and failure data

3 Industrialized support with domain insights and advanced analytics is the way Genpact has found over time that most OEMs and MSPs seeking to boost their analytical capabilities want an advisor that possesses state-of-the-art tools, can be as flexible as required in scheduling, and that draws from a wide pool of resources, both locally and offshore. Genpact brings to every client engagement a proven record of providing OEMs and MSPs with cost-effective deployments using globally located resources. Many blue-chip companies have benefited from Genpact s flexible and simple tools that are based on mature and proven algorithms. Genpact works with clients who are looking for help on a one-off project or an ongoing business, and who need partners willing to work on a fixed-fee basis or through target-based incentives. Genpact provides analytics services that help OEMs and MSPs at every stage of the contract from identifying potential prospects to analyzing team performance once the contract has ended. Genpact provides a wide range of services for each of the four stages of contract management: Pre-contract analytics - Successful contract management begins with the search for prospective clients. Genpact supports organizations with: Prospect identification. This begins with a broad analysis of the total available market, zeroing in on underserved segments, and identifying and forecasting the best contract opportunities among these customer groups. Cost forecasting. Genpact helps service organizations conduct reliability analyses and technical and financial computations of contracts. Scenario-based risk and pricing modeling. Determining the correct pricing for bids requires a full accounting of all of the potential risks that could occur during the execution of the contract. Genpact helps companies find the proper price levels through risk-sharing and sensitivity analyses, simulations of failure events, forecasts of failures and costof-ownership during contract restructurings, and operating margin analyses. Service contract win-loss analysis. Understanding why you won or lost can pay dividends with future bids. Genpact can help organizations gather competitive feedback and conduct retrospective analyses of lost opportunities. Genpact draws on leading tools to help companies conduct successful pre-contract analysis, including Weibull, Crow, and TAM/SAS models for market intelligence. Genpact uses these to help companies increase win rates, improve deal conversion times, and boost average margins on winning bids. Genpact also uses a proprietary cloud- and mobile-enabled tool called the Service Contract Optimizer, that enables clients to provide stakeholders with timely, detailed analyses and recommendations. Genpact uses these and other tools to help clients run more than 2,000 contract pricing scenarios annually. Contract setup and execution - Savvy executives know that even if their bid is accepted and the contract is signed, the real work lies ahead. By drawing upon its expertise in statistical and financial modeling, operations research, risk management, and core engineering, Genpact can help service organizations ensure that their execution is a success. Genpact provides the analytics to help companies with: Baseline measurements. Genpact helps analyze each of the terms and conditions of the contract, and develop the workflows, databases, and monitoring capabilities to ensure that the contract is followed to the letter. Service planning and fulfillment. Genpact provides the analytics companies need for demand forecasting, cost accumulation, capacity planning, and for managing repairs, orders, and vendors. Warranty support. With warranties for products such as swimming pools and wood siding now stretching to as long as 60 years, manufacturers and service organizations have more reason than ever to get the finances behind these guarantees right. Genpact provides a range of analytics for these guarantors, including tools for warranty and reserve forecasting, claims management, operational management, and financial management. Enabling, monitoring and reporting. The logistics of providing maintenance and repair services can be costly. To keep these costs in check, Genpact helps service organizations analyze delivery and vendors costs, track equipment, and implement other cost-reduction programs. Billing, invoicing and collections. Poor billing and collections are the biggest sources of revenue leakage. To minimize these risks, Genpact provides analytical tools for contract flow-down, billing, profit booking, collections, and past-due accounts. Contract appraisal analytics - Given the many individual tasks involved in service management, Genpact provides the analytics by which companies can benchmark their performance. These include: Data-gathering and data quality assurance. Genpact helps companies extract and validate data, cleanse and categorize data, evaluate the true cost-per-event, and identify the leading cost drivers. Forward-looking failure and cost modeling. Our team helps service organizations collect historical data, select the appropriate simulation models, forecast the costs-per-event and the event schedule, and re-assess the financial impact.

4 Genpact service contract analytics - solution portfolio INVOICE Pre-Contract Analytics Contract Setup & Execution Contract Appraisal Analytics Contract Portfolio Risk Analytics** Prospect identification support Baseline measurements - T&Cs* Data gathering & data quality assurance Portfolio creation/ maintenance Cost forecasting (using reliability & failure forecasting) Service planning/ fulfillment/warranty support Forward looking failure & cost modeling Risk profile measurement Risk based pricing scenario based modeling Contract enabling, monitoring & reporting Profitability analytics/kpi measurement/identification of cost out opportunities Counter party credit analysis and exception triggers Service contracts win loss analysis Billing, invoicing & collections Global benchmarking Portfolio performance benchmarking *T&Cs- Terms and Conditions **For new and ongoing deals Profitability analytics and KPI measurement. To make sure clients service operations achieve profit goals, Genpact provides tools that enable them to evaluate operating margins, compare operating plans against the variances, identify causes of margin variance, and implement corrective actions as needed. Identification of cost-out opportunities. Services include identification of productivity projected based on root cause analysis, estimates of the impact of projects, project fulfillment productivity, and identification of cost-out scopes. Global benchmarking. Genpact helps OEMs and MSPs identify best practices, implement them through reengineering, monitor changes over time, and then conduct loop-back learning. Genpact uses tools from IBM/Cognos, Cosmos, Oracle, and SAS to help construct generic failure forecasting models and deal with profitability models. These models enable companies to build metrics to plot profitability and performance over time. Contract portfolio risk analytics - While large OEMs and MSPs may have relatively large stables of customers, size alone offers little protection without proper diversification. Genpact can help determine the true risks of the client base. Our analytics cover: Portfolio creation and maintenance. Genpact enables companies to determine the assumed risks during the actual construction of a portfolio. Risk profile measurement. Our team helps service organizations build reconciliation scorecards and other metrics for quantifying their risk profile. Counterparty risk analysis and exception triggers. To help clients through the financial risks posed by each customer, Genpact provides a range of analytics including customer risk dashboards and other tools for monitoring past-due accounts and receivables, assigning credit limits and payment terms, and creating triggers for exceptions. Portfolio performance benchmarking. Services include identifying elements of risk and developing risk-adjusted valuations. The identified risks are categorized into five classes: credit, technical, behavioral, execution, and macroeconomic. Genpact customizes each benchmarking model based on the client s priorities and requirements. Key metrics include contract lifecycle profitability, average deal margins, contract lifecycle revenues vs. plan, deferred-balance analysis, and credit-risk mitigation.

5 Genpact helps a global aviation services major profitably salvage a US$100 million+ service contract with a distressed airline by reengineering the fleet retirement program Challenge An aviation services company faced losing one of its largest contracts for aircraft engine maintenance with a major airline. The airline was considering immediately grounding its complete fleet due to severe cash flow issues due to rising fuel prices, increased cost of finance in a crisis economy, and lower passenger traffic. The service provider was at a net-loss on a YTD basis because of front-loaded shop-visit schedules for relatively older engines in the year. This scene could change only if the contract could be continued on relatively new engines with lower costs of service. Genpact Approach Genpact started by conducting reliability-based failure forecasting of the engines in the fleet and factored in the projected costs of future maintenance. Genpact then ran multiple simulations of engine performance by changing the retirement dates for each engine in the fleet. With the help of pricing and margin-evaluation tools, Genpact built retirement scenarios by plugging in the reconciliation amounts that the aviation services company would be contractually required to pay if any engines were grounded or retired. Genpact s analysts designed the optimized maintenance schedules by enhancing costs and discount opportunities following consultations with the company s sales, operations, service, and risk teams. After conducting a cost-benefit analysis of every engine in the fleet, Genpact identified a number of engines that met the retirement criteria. Genpact Solution For each aging engine that the airline retired, the aviation services company provided the airline with a rebate equal to the projected cost of servicing that engine over the following five years. As part of the deal, the aviation services firm provided the airline with $13 million in upfront rebates cash the airline sorely needed. Genpact also used its analytical skills to conduct risk and profitability studies that helped the aviation services company optimize its work schedules and spare parts inventories for the renegotiated contract. Genpact s efforts enabled the aviation services company to provide the airline with much-needed financial relief while protecting its own financial interests. Impact With Genpact s help, the aviation services company restructured the airline s maintenance agreement in ways that cut out $66 million in costs. Under the revised maintenance agreement, the airline received the savings it needed as well as $13 million in upfront rebates to help offset soaring fuel prices. The goodwill gesture paid off: The airline later agreed to extend the engine maintenance contract by an additional five years. AMS contract analytics at Genpact OEMs and maintenance service providers choose Genpact for the technical knowledge, industry experience, and the synergies from the business process solutions it brings to each assignment. Genpact possesses: Robust methodology and tools Six-Sigma-based, rigorous methodology to drive continuous improvements Proprietary tool Service Cost Analyzer offers granular visibility and real-time analytics Proprietary algorithms built on robust process and domain understanding, and enhancements on industry-leading statistical tools such as Reliasoft s Weibull++ and RGA+ Strong service contract analytics experience 10+ years of expertise with blue-chip clients in managing large contracts worth more than US$30 billion annually

6 250+ analysts with strong quantitative skills, 90 percent of whom are statisticians, economists, engineers, and MBAs with deep technical and domain knowledge Process expertise, benchmarks, and best practices across industries - aviation, energy, oil, and gas, and transportation Flexible business solution Initial four-six weeks diagnostic and proof of concept engagement Global delivery model to bring cost efficiencies and leverage local market insights One-time or project-based engagement; both basic transactional and analytics-based decision support Genpact operates a global delivery model that is cost-effective, scalable, and customizable. We augment our customers existing resources with proprietary tools and methodologies that can be tailored to meet each company s unique needs. Our technology solutions can be delivered on site, via the cloud, or by mobile. About Genpact Genpact Limited (NYSE: G), a global leader in business process management and technology services, leverages the power of smarter processes, smarter analytics and smarter technology to help its clients drive intelligence across the enterprise. Genpact s Smart Enterprise Processes (SEP SM ) framework, its unique science of process combined with deep domain expertise in multiple industry verticals, leads to superior business outcomes. Genpact s Smart Decision Services deliver valuable business insights to its clients through targeted analytics, reengineering expertise, and advanced risk management. Making technology more intelligent by embedding it with process and data insights, Genpact also offers a wide variety of technology solutions for better business outcomes. For more information, visit Follow Genpact on Twitter, Facebook and LinkedIn Copyright Genpact. All Rights Reserved. For More Information, Contact: contract.analytics@genpact.com Visit us at: service-contract