Services - growth on a slippery slope

By : Jim Pinto,
San Diego, CA.

End-users are scrambling to reduce costs and many have even eliminated engineering and maintenance services. Reacting to this demand, automation suppliers are expanding their service offerings to “total solutions” responsibility, which puts them into competition with some of their own local integrators - a slippery slope.

This article was published by:
Automation World, October 2005

In today’s competitive global markets users are scrambling to reduce costs and improve asset utilization. Many have even eliminated engineering and maintenance services, preferring to outsource these functions. Reacting to this demand, automation suppliers are expanding their service offerings to “total solutions” responsibility which includes engineering, systems integration, direct sales and supply logistics, training and maintenance. Third-party suppliers are being by-passed, or at least challenged to collaborate or compete.

Many automation products have become commodities, available from several sources with marginally different features and benefits. And new products are not forthcoming – product development budgets have been cut and there is simply no dazzling new technology on the horizon. In global markets, product requirements keep changing, margins are shrinking and there is pressure on market-share. Most of the automation majors are looking for growth beyond just products. They’re migrating to “Services” which, according to ARC, is the fastest growing segment in the automation market today.

The problem is that "Services" are knowledge intensive, tending to involve relatively narrow, application-specific expertise, which call for special modifications and extensions of standard offerings. Further, they typically include on-site systems design, integration and startup involving many different products, beyond the broad portfolio of even the largest suppliers. This type of business is usually subject to intense competition by smaller engineering and systems integrator firms, and cannot easily be scaled up for consistent revenue growth and profit margins.

Hitting a nerve

In the past most manufacturers, even major suppliers, could not provide the wide range of products and services needed in complete system. This meant that the engineering and systems integration was typically was done through third-parties. At the high end, there are the large Engineering & Construction firms (E&Cs) who do the design and carry the project through to installation and services. These have always been a large segment of the product-suppliers’ customer base. The new service offerings by major suppliers sometimes hit a nerve with E&Cs, themselves struggling to grow.

Smaller projects are the realm of Systems Integrators, typically relatively small service organizations serving only vertical markets in limited geographical areas. Also, there are applications engineering distributors (AEDs) who serve local markets, doubling as stocking distributors and service providers. Major suppliers must recognize that their service offerings put them into direct competition with these companies, often some of their best customers. The manufacturer has the advantage of additional margins and proprietary product applications knowledge – but the integrator has the advantage of having access to competitor’s products, and can often switch to compete.

The typical SI is a small company (under $10 million) without any real marketing and breadth of geographical coverage. Product manufacturers like Rockwell have a significantly greater depth of marketing savvy which allows them to study total end user requirements and develop more sophisticated offering such as strategic, preventive and predictive maintenance, as opposed to old-style reactive services. Today, for example Rockwell GMS offers “embedded” personnel to provide preventive maintenance, operations support services, startup, troubleshooting, upgrade assistance, project management, training, performance analysis, application development and more. Plus, they provide fairly sophisticated tools to measure business performance and maximize total life-cycle ROI. Few small service providers can match those offerings.

Systems integration and services always require local presence. The large manufacturers have the financial wherewithal to expand globally. But, they lack the ability to provide the depth of service and the “relationships” that the local service providers offer. The dichotomy is difficult to bridge, and expensive.

Large suppliers (Rockwell, Honeywell, Siemens, Emerson) push for global contract relationships which, of course, small suppliers cannot offer. But, developing local talent to provide high-quality services for large global customers is expensive, and takes time. It’s a slippery slope.

In the new economy, the winners will be technology suppliers who offer the best products, combined with the ability to disseminate knowledge effectively with global reach, to provide high-value-added services through effective local service providers. There’s a new maxim: Go global, stay local.

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