Services are key to GCC industrial companies’ sustained growth, a study has shown.
In many industrial companies, services play virtually no role. Yet the service business is reporting growth rates up to 40% faster than sales of new products, points out Bain & Company.
“What’s more, the gross profit margin of services is on average a good ten percentage points higher,” Bain & Company said in its latest study, “Winning in industrial services,” in which some 45 industrial companies underwent an in-depth benchmarking analysis.
In the current economic environment, industrial companies have found it difficult to generate growth, the study showed.
Barring a few exceptions, the investment rate in new plants and systems has been very low. Compounding this is the increasingly tough competition these companies face primarily from Asia but also closer to home. Some of the most successful industrial goods producers have recognised this situation and expanded their range of services accordingly, visibly boosting their overall results in the process.
As Bain’s analysis reveals, revenues from services business between 2010-2013 climbed by an average 9% per year, which compares favourably with slower sales growth for new products, which saw a revenue increase of only 5%. Companies with a high service share also accomplish an above-average margin for the company as a whole.
“In the current market climate, services are the only means by which many industrial companies are able to boost revenue and profit,” said Pascal Roth, partner at Bain & Company and author of the study.
“Services have the added advantage of strengthening trust and customer ties.”
In a market in which products are becoming increasingly interchangeable, companies can gain the key competitive edge over their rivals by offering a range of state-of-the-art services. But, most industrial companies still have a long way to go before they can achieve this. In machinery and plant engineering, for example, services currently account for only 25% of total revenues — although the margin in this segment is very high at 42%.
“The service business in GCC is not given the importance it deserves,” said Eric Beranger, partner in Bain & Company’s Middle East office. This may be due to certain prejudices in the minds of the decision-makers, but which the Bain study refutes.
“In a slower economic growth environment such as the one the GCC faces as a result of lower oil prices, services are an important growth driver for industrial companies. Business leaders ought to grant the service business the attention it deserves to sustain their margins in a softening economic environment,” Beranger added.
The significance of the service business for corporate success will indeed continue to increase.
According to the Bain study, by the year 2020 industrial companies can expect to double their revenues generated from services.
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