When an IBM survey of 450 CEOs asked what factors lead to the creation of distinguished products and services, 40 percent responded "providing or expanding solutions and after-sales support." Indeed many industry leaders—including Xerox, Caterpillar, and GE—use service revenue as a competitive advantage and collect 40–70 percent of their profits through service. The growing awareness of the importance of service has companies looking at how they can increase this aspect of their business.

However, before companies can achieve service growth, they need to identify the maturity of their service operations. AMR's four-stage service lifecycle management (SLM) maturity model gives companies a framework to benchmark their SLM maturity, plan their strategy, and avoid unnecessary investments. (Exhibit 1 summarizes the stages and their associated technology and measures.)

In stage 1—baseline service—companies focus mainly on responding to requests from customers in a timely manner. Typically this stage involves taking the burden for service activities off of the product organization. Companies can consider themselves mature in this stage when they have processes to handle warranties, track customer inquiries to resolution, and provide technical documentation. In stage 1, companies focus externally on providing benefits to the customer, and their key measurement is response time.

In stage 2—operational efficiency—the company shifts its focus internally to reducing the cost to perform these service activities. In addition to monitoring response time, the company starts tracking the cost to serve as a key performance indicator. This shift often involves trying to reduce inventory, personnel, and infrastructure without reducing service levels.

After reaching stage-2 maturity, companies need to make a strategic decision: Do we view service as a revenue generator or as a cost center? If service is revenue-based, then companies must move to stage 3—customer support excellence. Here they look at how their service can make customers more efficient. The process capabilities in stage 3 increase the service value and include such techniques as vendor-managed inventory and installed base information management. At this stage, the customer will receive most of the benefits as companies struggle with the value of their newfound capabilities. Ultimately, however, this strategy will create a path for revenue generation. That revenue opportunity, however, depends on the market response. For this reason, tracking market share with respect to overall service opportunities should join the list of key metrics.

During the fourth and final stage—structured to grow—companies develop solutions that grow the market opportunity and change the concept of what service is. Market analysis and new product development become the key competencies for companies at this stage. At this point, companies have all the basics down and are more than 70 percent automated across all stages. Here, they start introducing remote diagnostics, which allows them to evaluate the product usage and discern their service-market opportunities. Companies can then focus on pricing and contracts to control the service delivered vs. overall profit. At this point, year-over-year growth is added to the metrics list.

The four stages of service maturity can be defined in terms of who receives the primary benefit (the external customer or the company itself) and the potential economic value provided by the service level. (See Exhibit 2.) Most companies are still in the first stage of maturity, moving into the second. On average, going from stage 1 to stage 2 should reduce operating costs by 20 to 30 percent and increase service levels by 5 to 10 percent.

After stage 2, success depends on the company's strategy choice. For most companies, service operation strategies take one of two forms. In one strategy, service generates revenue; in the other, it is seen as a cost center aimed at handling inbound requests. Whichever strategy is adopted, the evolution of the service operation follows the stages of the maturity model shown in Exhibit 2. However, after stage 2, the expectation for cost reductions should be half of what was previously achieved. The revenue potential in the last two stages depends on management commitment, manifested through strategic investments and market maturity. A company's ability to move from one maturity stage to the next depends on having achieved a level of process and technology competency in previous stages and on the market opportunity available.

Service organizations generally generate 45 percent of a company's profit, but they only receive 30 percent of the IT budget. They use that limited funding, however, to make smarter and more efficient technology decisions.

Recent survey data shows that a company's level of business process automation in service correlates with its ability to grow that service business. For example, 100 percent of companies that have reached the highest level of automation have seen an increase in their service business over the last three years. This top level of automation is characterized by having all of its applications at least partially automated and at least 50 percent of applications fully automated. In contrast, only 50 percent of companies with no automation and 55 percent of companies with partial automation have grown their business.

No matter what their automation level, companies are still experiencing obstacles to gaining funding and increasing automation. Those with the highest level of automation are hamstrung by the fact that available products do not meet their needs. These companies should concentrate on marketing and leading-edge remote management capability. Those with less automation, on the other hand, suffer from a lack of management commitment and/or customer interest. Before they can move through the maturity stages, companies must evaluate their customers' desire for service relative to their brand position. For example in the PC industry, Dell can leverage its ability to compete on brand and decision risk at the product level to generate service revenue (Stage 4). PC manufacturer eMachines, however, is limited by its low-cost model and is better off focusing on stages 1 and 2.

When evaluating their service strategy, companies must determine the following:

• Customers' perception of the relationship.
• Brand position at the product level.
• Current service maturity stage.

Companies can use the SLM maturity model to help them make the best service-operation decision for the strategy that they have chosen. However, before putting more money into the service operation, they need to assess their maturity and evaluate projects based on the following:

• What is the long-term goal for service: revenue or cost?
• What does this project do to move the organization to the next logical stage?
• What are the abilities of the customer base to absorb and value the service improvements being made?
• What other projects should we be completing before taking on this one to fill out the prior stages of maturity?

The answers to these questions will guide companies to their specific value and benefits along the SLM maturity model.

Author's note: For more information, see the AMR Research Report on Service Lifecycle Management (Part 2): Building a Roadmap for SLM Investments, Sept. 2002. www.amrresearch.com