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Making the shift to a customer–centric world An Accenture Aerospace and Defense customer services study

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A quick scan of the sky gives a very vivid picture of one reason why service is an increasingly important element of the aerospace and defense industries: the number of aircraft in commercial service has doubled in the last 10 years. And it is set to double again over the next decade. But the shift to service is driven by more than simply the sheer volume of equipment that needs to be maintained. A&D players’ business models are having to respond to new and rapidly changing customer requirements. Defense procurement in developed economies is under severe budgetary pressure, alongside the pressing need to maintain availability of equipment to globally deployed forces, with the result that procurement processes and contracts are increasingly defined to meet those dual needs. Emerging economies are a fast-growing

proportion of total A&D revenues, but buyers in those markets frequently require greater support and technology transfer as part of any acquisition. Low-cost airlines’ business models’ tight financial modeling demands accurate projections from their suppliers of a fleet’s likely costs over its lifetime, including scheduled and unscheduled maintenance.

All across the industry, customers’ needs and expectations are changing fast. The question is how rapidly the industry can adapt.

Why we conducted this research

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32 executives in leading aerospace •and defense companies worldwide, based in Europe, the Americas and Asia.

The countries within the scope •of the research included the US, Canada, Brazil, UK, Germany, France, Italy, Spain, Sweden, India, China and Singapore.

In order to achieve a representative •sample of Aerospace and Defense industries and take into account the various business models, we interviewed a mix of companies in airplane, equipment, helicopters/business jets and MRO.

25% of companies interviewed •have a revenue above $10Bn and 44% between $1Bn and $10Bn.

The executives interviewed were at •the levels of customer service VP

or customer support, Head of sales and marketing or equivalent, Head of customer service or equivalent. All respondents targeted were closely involved in the decisions related to the customer service strategy of their companies.

The interviews were conducted •by telephone interviews from February to March 2011 by an external market research agency in order to guarantee the quality of the responses and to ensure the objectivity of results.

The Accenture A&D customer services study: survey sample and methodology

Emerging

Western Europe

North America

Region

59%

MRO

Equipment

Airplane

Primary Activity

19%16%

56%

9%

Helicopters/Business Jets

Less than $1Bn

$1Bn - $10Bn

>$10bn

Revenue

25%31%

44%

25%16%

Figure 1: The Accenture A&D customer services study sample structure

Source: Accenture Services in Aerospace and Defense Survey, 2010

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The importance of this shift to services and away from traditional manufacturing models is well understood by most — if not all — companies in the sector. The majority see the need to increase customer satisfaction as their number one priority for service (see Figure 2 below). How well prepared they are to respond and take advantage of the service opportunities before them is rather less clear. In fact, recent Accenture research1 suggests that many companies in the A&D industry have yet to take the transformational actions that will allow them to fully capitalize on new opportunities and serve customers in new ways to increase customer satisfaction and drive revenues and profitability.

Our research shows a clear disconnect for many companies between their awareness of the importance of

service in the future and the steps they are taking to build the business models that will enable them to get there. Some 75% of companies surveyed rate the importance of offering competitive services to their clients in the next three years as critical. But only half (53%) of the companies surveyed say that they have a clearly defined service strategy in place, see Figure 2.

Figure 2: Disconnect between critical importance of service and defined service strategy in place

1Research carried out on behalf of Accenture in February and March 2011 with 32 executives of leading Aerospace and Defense companies across global markets

CriticalImportant

No, but in discussion

Yes, defined but not implemented

Yes, defined and currently implemented

Q - How would you rate the importance for your company to offer competitive services to your customer over the next 3 years?

Base = All respondents

Q - Does your company have a clearly defined service strategy in place?

75%25%

53%38%9%

Good intentions... less positive action


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2Significant differences should be interpreted with caution (as trends) due to the limited sample base size.

The need to move towards service is driven by a number of converging factors. Flattening margins from the sale of equipment is one. Shifting customer behavior towards paying to use an asset rather than own is another, which allows companies to remove not only platform acquisition costs but also the risk and the burden of keeping it operational. The need to enter emerging markets where the demand for service is heightened by the lack of existing infrastructure on the ground creates additional demands. And there are competitive pressures coming from some parts of A&D companies' traditional customer base. For example, some airline operators are investing heavily in acquiring the capabilities and know-how required to provide service support to their fleets and are driving an increasingly large proportion of their revenues from service. If A&D businesses do not move rapidly, they risk losing out to new

Figure 3: Share of revenue from service today, share of revenue projected in next 2-3 years2

Shar

e of

Rev

enue

Shar

e of

Rev

enue


Q - Today, what is the approximate share of services in your company total revenues and what will be your objective in the next 2 - 3 years?

Today

Next 2-3 years

MRO

MRO



Equipment Airplane

AirplaneEquipment

30% - 50%

30% - 50%

21% - 30%

21% - 30%

Up to 20%

Up to 20%

Don't know

Don't know

40%

33%11%

28%

33%

0%

33%

20%0%

20%

40%

40%

33%

33%

33%

11%

39%

22%

28%

33%

50%

17%

11%

28%

11%

50%

20%

40%

40%

67%

33%

33%

33%

33%

entrants or other more agile players who may move first to take advantage of the opportunity that service presents.

Of course there are significant differences between the service needs (and maturity) of different sub-sectors and markets. As the graph below illustrates (see Figure 3), different sectors are already achieving different levels of revenue from service and have various ambitions to increase that contribution over the next 2-3 years.

Why is service important?


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Increasing complexityThe evolving nature of equipment places an emphasis on service provision. The complexity of a modern airliner, for example, dwarfs its counterpart of only a decade ago. The avionics for a modern aircraft generates vast amounts of data that needs to be managed effectively in order to maximize the efficiency of its operation and ensure that customers’ use of their asset meets their expectations of availability and performance. The same applies equally to defense systems. However, managing those service propositions on a global scale requires both distributed information technology systems and a human capital capability that are vastly different to the familiar, centralized models with which A&D businesses have traditionally operated.

Changing production schedules Production methods and schedules that were built around a manufacturing model are also fundamentally different to those that a service-driven business demands. The challenge A&D businesses face is to operate service capabilities schedules that integrate their service parts, assets, and human resources beyond their company boundaries, while at the same time understanding how they can meet the requirement of the lifetime asset management of highly complex equipment.

A fast-changing supply chainThe supply chain, too, is changing fast. It is extending away from end-to-end ownership and towards a far more complex interaction of suppliers and partners. Achieving visibility of service across an extended enterprise raises additional challenges for all A&D businesses to service their customers effectively. The move to service also creates the need to ensure that the reverse supply chain – i.e. the ability to retrieve and refurbish replaceable parts- is managed far more effectively. Without the ability to do that, A&D businesses risk seeing their working capital reduced and margins eroded as replacement equipment is abandoned and not returned for repair and renewal to extend its productive life as far as possible.

Important key driversHowever, it is clear that the drivers of change within all markets are increasingly demanding a response to improve service in order to meet customers’ expectations – both in the defense and civil sectors.

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What does high performance look like? Meeting expected performance raises major challenges and new demands on A&D businesses’ organizations and operational models. However, there are some fundamental requirements of customer service that underpin high performance. These include the ability to deliver on time and to expectations–in other words to keep promises – while keeping cost to serve under control. But regardless of how simple this aim is to articulate, in highly complex industries it is a goal that many businesses fall short of achieving consistently. Additionally, understanding customer requirements and executing accordingly sounds simple enough. But in our recent research, it is clear than many businesses do not have a sufficiently well-developed understanding of customer requirements and priorities and are accordingly unable to anticipate their needs in order to deliver what they want and at the right time. Only 38% of respondents described their customer services operations as being completely integrated into their sales services operations.

In contrast, leading companies are pushing ahead. High performance businesses are increasingly augmenting their traditional strengths with a range of value added services that are meeting changing customer demands. Companies that are leading the way are seeing the benefits of their customer-driven strategies show through in their revenues growth, with 25% reporting revenues from service of between 30% and 50% of total revenue see Figure 4. And those are the proportions of revenue to which many A&D players aspire in the next 2-3 years.

Figure 4: In the next 2-3 years, 44% of companies expect the share of services to amount to 30% to 50% of their company total revenue


Q - Today, what is the approximate share of services in your company total revenues and what will be your objective in the next 2-3 years?

Share of Revenue

Today

Next 2-3 years

30% - 50%21% - 30%Up to 20%Don't know

22% 44%

19% 25%19%

22% 22% 12% 44%

34% 22% 25%

Figure 5: A&D companies are seeking a position where services are the products

A&D companies have been actively shifting their business model from one centered on products and programs, to one where services are used to differentiate, lead and/or wrap the products.

Business Model OrientationProducts Focused Services Focused

Random Opportunism < 1% services

Offer ad hoc service support for best customers

Structured Opportunism 2-10% services

Lead with product, but sell services when opportunity presents itself

Specialist Service Provider 10-25% services

Lead with product, but provide services to differentiate and enhance product sales

Business Integrator 50-100% services

Organize operating model to provide standalone services

Recognized Solution Provider 25-50% services

Lead with services to offer complete solutions or services that wrap around the product or pull through product sales

Services support Products

Services differentiate

Products

Services lead or wrap

Products

Services are the

Products



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The scale of the problem and the size of the opportunityService owes its priority place on the agenda of most A&D companies for a number of reasons. But nearly all of them relate to changes in customer behavior. It comes as no surprise then that in our research, acquiring a 360-degree view of the customer and meeting their needs was the most cited transformation companies said they had to make.

There is no doubt that responding to the service challenges they face is a key aim for all businesses in the A&D sector. The key short-term aim for companies surveyed is to increase customer satisfaction, with 75% rating this as their present top priority, see Figure 6. But rather than seeing services as providing new revenue opportunities, most respondents cite defensive reasons

for the importance of service. The top three reasons provided were staying competitive (59%); differentiating from competitors (53%) and customer retention (41%). Only just over a fifth cited drivers such as entering new geographies (22%), driving incremental margin (2%) or acquiring new customers (19%) as reasons for investing in services, see Figure 7.

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Figure 6: Customer service priorities

Q - In the next 12 months, what will be the priorities related to customer services for your company?

Figure 7: Reasons to invest in customer service


Get incremental margin

Customer acquisition

Grow revenues

Meet new customer demand

Enter new geographies

Stay competitive

Differentiation from competitors

Customer retention 41%

41%

38%

22%

19%

22%

53%

59%

Gro

wPr

otec

t

Q - In your company, what are the top 3 most important reasons to invest in customer services?

Integrate Customer Services with (preferred) customers

Define a clear customers segmentation

Integrate Customer Services with other functions

Define sustainable and appropriate pricing rules

Develop skills and capabilities

Set a contractual agreed SLA

Formal tools and process for capture customer’s needs

Develop new support & services

Develop innovative contracting model

Increase customer satisfaction

Generate additional revenues and improve margin

Reduce cost of operations 50%

37%

34%

25%

25%

16%

9%

28%

19%

56%

22%

75%

Currently top priorities



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Most A&D businesses have been historically driven by an intense focus on products. That product-centric orientation makes it challenging for them to shift their attentions to the needs of customers and building agile and responsive service-based business models around those identified requirements. There is a general low level of maturity in building customer-centric models and capabilities. More than half the companies surveyed (56%) agree that there is a pressing need to develop a customer service mindset, and rate this as the number one challenge they face in the next three years to achieve their service goals, see Figure 8. Yet many will need to achieve a step-change to do that and hit their targets for the increases of the total proportion of their revenues that they expect to derive from service in the next 2-3 years. Fully 44% of companies surveyed expect these to be 30% to 50% of all revenues by then see Figure 4.

Apply adequate customer services metrics

Protect intellectual property and confidentiality

Integrate customers in the company's support and services ecosystem

Ensure/Get incremental profitable service revenues

Extend its services portfolio and geographic footprint

Integrate supply chain within sales and customer services

Develop customer services mindset/attitude

Increase customer satisfaction

Reduce total cost of ownership over the entire product and services lifecycle

47%

41%

28%

19%

13%

9%

28%

56%

56%


Q - In your company, what are the top 3 most important reasons to invest in customer services?

Figure 8: Challenges in developing customer services for next 2-3 years

The results of the survey show that there is little maturity in the way that services are designed and offered to meet the needs of specific customers, and little integration of service considerations into other key capabilitiessuch as sales, supply chain or engineering, see Figure 9. When asked to identify the services that they offered to their customers today a high proportion indicated a wide range, as shown the in Figure 10 opposite.

A relatively low proportion, however, have clear plans for service development in specific areas or to support particular activities. What this indicates again is the clear gap between actions and intentions. The criticality of services to drive high performance is understood on a conceptual level. The steps to drive theory into practice are often less well defined.

A change of focus needed


1111

Figure 10: Services offered

Spares and logistics

Technical publication

Technical support

Training

Warranty Management

Engineering advisory

Aircraft on Ground

Service By Hour/Part By Hour

MRO


Q - Which services are you currently offering to your customers or are you planning to in the next 2-3 years?

In discussion but not planned

Not planned Planned in the next 2-3 years

Currently offered

3% 3% 3% 91%

3% 6% 91%

13% 88%

3%9% 3% 84%

13% 3% 6% 78%

16%3% 3% 78%

9%3% 9% 78%

6%13% 6% 75%

9%22% 3% 66%

3%

Figure 9: Limited customer service integration within sales services operations

Q - How would you best describe the current integration of your customer service into your global operations?

Completely integrated into global services operation

Somewhat integrated

Not integrated: Silo approach 7%

61%

32%38%

59%

3%



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Partnering

Many companies also retain the desire to maintain services ‘in-house’ – to retain control – but this serves to limit agility and focus that are essential elements of effective customer service and ever more vital in responding to new global markets. Respondents’ answers showed little expectations that they would increase the use of partnerships and alliances or other third-party providers to operate their customer service in the next 2-3 years, with only just over 25% using such arrangements today and only 28% expecting to increase in the next two to three years, see Figure 11.

As they expand into those new markets, and the needs of their customers increasingly develop from ‘ownership’ to ‘use’, A&D businesses will need to develop a more collaborative approach to address the needs of providing operational support around the globe as buyers’ demands shift to availability. That means investigating joint ventures and opportunities to work with others who

Figure 11: Use of partnerships and third parties, today and 2-3 years


Q - How do you currently operate your customer services and what is your strategy for the next 2-3 years (Averages)

Customer services operations will stay in-house in the next 2-3 years

Today

Via partnership and alliances

Other Via sourcing from external providers In-house

Next 2-3 years 1% 21% 71%

17% 73%

7%

1% 9%

Base = All respondents where alliances and partnerships are above 0%

Figure 12: Reasons for partnership to operate customer services; mentioned only by 9% of survey respondents

Q - What are the main factors driving your company to develop partnerships for your services offering?

Extend global presence

Logistics capabilities

Complementary services

Secure knowledge/skills/Know how

Develop software assets

Complementary products

74%

65%

52%

30%

22%

9%

understand local markets and their requirements. In addition, partnerships with companies that already have an embedded service culture and a client centric mindset can help accelerate cultural change.



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Pricing

How to price services is also a key element of moving to a services-oriented business model. The survey reveals a broad mix of pricing methodologies in place, see Figure 13. These range from pay per action, through a total service package and availability-driven pricing. Most respondents cite competitive pressures (75%) and price sensitivity (75%) as the greatest challenges to implementing their services pricing strategy, with a smaller number (56%) only suggesting that organizational and operational issues as relevant, see Figure 14. However, as companies seek to move to a lifecycle product management business model they will increasingly need to design in the pricing strategy and this ability hinges on the appropriate organizational and operational strategy to achieve the appropriate returns.

Figure 13: Pricing methodologies


Q - What type of services pricing methodology do you currently have in place and which one do you plan in the next 2-3 years?

Today

Competitive pricing

Value based pricing

Cost plus

Planned in the next 2-3 yearsNot considered

69%

16%

75%

9%

85%

75%

16% 31%

85%

9%9%6%

69%

Figure 14: Pricing challenges


Q - What challenges are you facing to implement your services pricing strategy? Select all that apply

Fierce competition

Price sensitivity

Organizational issues

Adequate metrics

Lack of awareness about available pricing methodologies

75%

75%

56%

50%

25%



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The human angle – HR impacts and changing the culture

One of the key drivers of the successful shift to service is achieving a customer-driven culture throughout the organization. A human capital strategy needs to be integrated at every level with the business strategy in order to create a service organization that is built around the needs of the customer.

Today, many A&D businesses are focused largely on production. Driven by a technical and engineering mindset, service is naturally accorded a lower priority. That means in the battle for the best resources, service is likely to lose out. Functions such as sales and marketing and CRM operate alongside – rather than with – design and production. Talent strategies are often not aligned with business goals and rewards, performance management and development priorities do not reflect the stated emphasis on customer service.

The 360 and the customer service integration

A&D businesses clearly recognize that they have significant progress to make in improving their customer service capabilities in a number of critical areas. They cite the importance of understanding specific customer requirements and acquiring a 360-degree view of the customer as areas where their performance either requires significant or some improvement, see Figure 15.

They employ various methods to gauge customer satisfaction today, but the majority (58%) rely on regular customer surveys. Only 13% report that they use internal channels such as sales support as a major conduit of feedback. That lack of integration between service and other functions is highlighted by the 67% who describe their customer service as only either ‘somewhat integrated’ or ‘not integrated’ with their global operations. Yet fully 71% of all respondents state that they plan to have customer services fully integrated with global operations in the next 2-3 years, see Figure 16.

Figure 15: Areas for improvement


Q - What is the performance of your customer services on each of the following areas?

Customers specific improvement plan

Actionable segmentation based on buyer values and customers profitability

360 degree view of customer

Ability to measure customer satisfaction

Ability to meet performance targets in the different service areas

Ability to capture new services demand

Tailored pricing and customer profitability modeling

No process in place to measure it Significant improvements required

Mixed performance - some improvements required


9% 16% 69%

9% 60%22%

19% 22% 43%

6% 13% 56%

6% 22% 44%

9% 19% 41%

9% 6% 63%

Cost to serve 9% 62%16%

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Figure 16: Limited customer service integration today

Base = All respondents which customer service is somewhat integrated or not integrated to their global operations

Q - Does your company plan a complete integration of your customer service into your global services operations in the next 2-3 years?

Q - How would you best describe the current integration of your customer service into your global operations?

Completely integrated into global services operation

Somewhat integrated

Not integrated: Silo approach

No

Yes

7%

61%

32%


32%

61%

29%

71%

7%

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Bringing this all together:

Asked to identify the transformational steps they believe will be required to implement their customer strategies, respondents clearly believe that a better view of the customer is the key requirement. And they also identified the need for a cultural shift from product driven manufacturing to a service culture that is fundamentally based on a close understanding of customer needs.

Accenture believes that to achieve their aims, there are a number of key activities and capabilities that all A&D businesses will need to develop in order to orientate their business models to an increasingly customer-driven model.

Know the customer, wherever they are As survey respondents rightly identify, creating a services strategy should be based on as complete an understanding of the customer as possible. If in a multi-polar world it’s no longer the case that one product is suitable for all markets then that differentiation is even more pronounced for services. The services strategy has to be defined and articulated to meet those different requirements. The strategy will in turn indicate the organizational and operational changes required to ensure that it can be implemented effectively.

Model the finances Developing the pricing, business case for and the financial implications of a services-based strategy will demand detailed and complex analysis and financial planning and modeling. Both of these are essential to achieve the right balance between customer affordability and company profitability, and will inform the go to market and pricing policies for service offerings.

Leadership, talent and organization Credible and committed leadership is the foundation on which any fundamental change must be built. Leaders need to take complete responsibility to drive the services agenda and to enthuse and energize the workforce about the shift to services. A best practice human capital strategy builds from the

ConclusionThe results of our survey show that businesses in the A&D sector understand that customer service is critical for their growth and profitability. But how to build the business model, capabilities, organization and culture that will enable them to fulfill aspirations remains difficult. However, as the customers they serve increasingly demand new ways to achieve their own business objectives, those businesses that succeed in becoming true service providers will reap the rewards.

business’s strategic focus and translates what is required into specific priorities and actions across the domains of leadership, talent, culture and organization. If A&D companies are serious about their intentions to move into service, with the customer front and center across all parts of the organization, this is a model that they need to implement in their own businesses.

Identify, build, acquire and develop capabilities at scaleBuild or acquire the capabilities needed to execute the services strategy, through effective change enablement encompassing people, processes, locations, data, information system (IS) enablement and technology. While this is a long list, it illustrates the depth to which capability development needs to extend in the organization in order to create a truly effective service proposition.

Develop and manage partnerships The success or failure of A&D companies’ shift to service depends critically on how well they select and manage their collaborations, suppliers, partners and acquisitions. The extended supply chain, and the need to provide service at scale and speed means that few – if any – A&D companies can hope to achieve success on their own. The right partners and managing relationships effectively will prove pivotal in creating new business models.

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Contact usTo learn more about how Accenture can help your company achieve high performance, please contact:

Damien LasouGlobal Managing Director,Areospace and Defense+33 1 53236715

Accenture Research is Accenture’s global organization devoted to Business and Strategic analysis Bouchra Carlier +33 153235039 A&D Research Lead

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About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 211,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com.

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