Alex Klarman and Richard Klapholz

Introduction-the Need for Change

For several years, Customer Support Services2 (CS) operations were viewed as an enhancement to product or service sales and a significant revenue generator in itself. Over the years, however, the environment has changed dramatically where CS is providing only a marginal revenue stream at best in many operations.

The purpose of this chapter is to provide a "when to" and "how to" guide for analyzing the problems and designing a practical solution in the area of CS in product organizations. It shows how successful companies accumulate a very large installed base of their products over the years, with various commitments to its users. It can be either a blessing or a curse.

Good CS can be a significant asset, creating opportunities for repeat sales at low cost and effort. However, problems in this field can require ever-growing resources and steadily diminishing returns, as well as possibly jeopardizing future business relationships with clients and users.

The various domains of CS are presented, including the warranty, the nature of service contracts, the impact of CS on the revenues and the expenses of the firms, and the resulting impact on its bottom line. An analysis of the pertinent problems in all of these areas is addressed as well. The direction of the solution and the major solution components are described with respect to how they solve the core problems and therefore eliminate the limitations of the traditional approach to CS. Additional supporting actions required to provide a complete solution are given. Implementation and day-to-day management issues are discussed.

What Is Customer Support (Also Known as Technical Support)?

CS is a vast area of modern economy, and there is hardly a product or service that does not necessitate the use of it. Be it a cell phone, an electric can opener, a notebook computer, a TV cable service, a food processor, a new car, a new computer game, or even an old mattress (but one with a lifetime guarantee)-they all sometimes need external assistance with their proper installation, use, maintenance or repair, and finally, proper disposal.

The growing complexity of modern products, the richness of their features and the mind-boggling speed of technological advancement all make usage of new products (or services) a challenge to all but the few technically gifted (or simply very young). That, when coupled with ever shorter life cycles of most products, makes a thorough knowledge of all of a product's (or service's) features truly "Mission: Impossible," and makes external help an essential part of our daily life. However, the fact that it is such a daily affair does not make it any easier. Quite often, it is an ordeal we have to endure if we are to enjoy the benefits our modern world has to offer.

There is hardly a person who has not witnessed first hand both the best and the worst of technology; from a help-desk person who has revived a "dead" computer with a few simple instructions to a Kafkaesque ordeal, often involving automated replay systems.

In this chapter, however, we will limit ourselves to CS of industrial equipment and software, which is also called technical (or tech, for short) support.

So, what's this CS we talk about?

Of the many definitions one can come by when conducting a basic search on the Web, two main characteristics stand out: One deals with making a proper (and cost-effective) use of the product or service, while the other focuses on customer satisfaction. For example: The range of services designed to assist customers in making cost-effective and correct use of products or services. It may include assistance in planning, installation, training, troubleshooting, maintenance, upgrading, and disposal of the product (or service), as defined by www.BusinessDictionary.com.

According to Turban (2002), "Customer service is a series of activities designed to enhance the level of customer satisfaction-that is, the feeling that a product or service has met the customer expectation." For the purposes of this work, we will use the following definition, which combines both elements of the proper usage as well as that of customer satisfaction: Range of services designed to enhance the level of customer satisfaction-that is, the feeling that a product or service has met customers' expectations. It is achieved by assisting the customers in making cost-effective and correct use of product or service. It may include assistance in planning, installation, training, troubleshooting, maintenance, upgrading and disposal of the product (or service).

At once, this definition outlines the critical importance of customers' expectations in achieving the goal of providing a good CS. It also shows the wide range of CS activities, which can spread over the entire life span of a product.

However, it clearly shows that a significant part of CS activity comes quite early in the life cycle of the product; during the phases of planning its usage, the installation of the equipment (or service) and its initial use, together with the training of the staff in the proper procedures of exploiting it.

Usually, the first period of product (or service) use provides CS free of charge to the users; it is the warranty period. It is often then, when mundane reality, with all its problems, clashes with customers' illustrious expectations. True, quite often these expectations are derived from what the marketing and sales personnel have communicated-be it explicitly or implicitly-to the future clients. The resulting perception stemming from the comparison between the expected and what was actually delivered creates a lasting impression, which will (almost) forever influence-for good or for bad-the relationship between a particular customer and the product or service provider.

Thus, the quality of CS one receives may be a crucial element in future business decisions regarding repeat buy of a product or a service. Nowhere do these decisions have more impact than in the business of industrial equipment.

In this work, we will try to show how TOC and its application can significantly contribute to successful CS, and thus to a better, more successful business.

Steady Erosion of Income in the CS Area

Three main processes, which have steadily advanced over the course of the last few decades, contribute heavily to the problems the CS area faces today: In many key industries (printing, metalworking, textile production, and microelectronics, to name a few) the selling price of the equipment has decreased considerably. That, of course, made the equipment within the reach of many potential buyers who could not afford it earlier. The resulting growth of sales volume was huge. When coupled with the growing competition as a result of developing countries joining the ranks of the established production centers of the West and East, the economies of scale due to much larger markets, and the advent of electronics replacing mechanical or optical solutions, they enabled production of more and more sophisticated equipment at prices that continuously decreased.

At the same time, the growing complexity of the equipment put even greater and more varied demands on CS providers. Equipment, which was once the provenance of only the largest organizations with their own engineering and maintenance resources, now became available to much smaller firms. Once the equipment operates at these smaller firms, in which the division of labor between day-to-day operations and the technical support function does not really exist, it may create a problem. There is an expectation that somehow the equipment will always be functionally available, without the need of creating (and paying for) a specialized internal maintenance unit to make it happen. At such firms, the dependence on the goods' producer to provide the technical support is crucial.

There is an additional effect having its impact; the life cycle of equipment undergoing a continuous reduction, resulting in ever-shorter periods of time between the appearance of a particular piece of equipment and the arrival of its successor. Even in the short period of time between equipment generations, there is a steady stream of improvements, upgrades, changes, and additions to it. For the equipment producers it meant, if they are not to continuously increase their engineering ranks, they would have a great and growing strain on the engineering resources. As a result, quite often the products arrive in the marketplace before the full development process is completed; the rigorous testing procedures in various scenarios and multitude of operational environments, a true must at products directed to mass markets, is often cut short. That, in turn, brings about significant "growing pains" to the users of the products. The part of the equipment producers' organization, which will have to deal with the problems stemming from this is, of course, the CS unit. Many firms keep the older equipment after newer versions are available, forcing the CS staff to master the maintenance of a number of versions of its equipment, long after many have been replaced.

However, with all the dynamic growth it underwent, the modern industrial equipment market does not have the huge size of the true mass market (like that of cell phones, cars, digital cameras, or laptops). In contrast to the true mass production markets, the industrial equipment offer to the market is characterized by a wide variety of products and features, relatively low volume, and almost always high complexity. These characteristics do not allow for the economies of scale needed to bring its development process, as well as its production procedures, to deliver truly fail-proof products.

On top of these phenomena, which characterize a large part of the products market, there is a rather peculiar system for setting the price of the CS provided to the users of a particular product or service. Usually, after the conclusion of the warranty (guarantee) period, the service is provided at a fixed annual cost, which is some agreed-upon percentage of the selling price of the given product. Be it 1 percent or 20 percent, in exchange for it, the supplier is bound to supply a service, which grants the users the full functionality and service response they are expecting.

As with other parts of any business organization, CS is striving to contribute its share to the bottom-line results of the firm.

For many years in so many companies, the revenues of the CS organization were a major source of income. Moreover, as the annual CS contracts were almost automatically renewed year in year out, it was a source of very steady income, independent of the vagaries of the sales efforts. However, let us not make a mistake; the income derived was as a rule the result of hard work of top-notch professionals. At the base of it was an expert knowledge, a result of years of hands-on experience, which enabled it to happen.

As we have mentioned previously, the growing competition has brought about, with a plethora of other effects, a constant process of decline of the selling price of the equipment. That, in turn, has reduced the income derived from providing technical support for the installed equipment. Moreover, today the price, which is the basis for comparison between different suppliers of equipment, is the total cost of ownership (TCO), which takes into account not only the selling price, but also the expenses involved in keeping that equipment fully operational.

Fierce competition imposes pressure on equipment price and thus on the price of technical support, which leads to a steady erosion of service revenues. The net result is the fast transformation of what used to be a very profitable part of the business into a problematic one. Its impact on the overall profitability of the equipment business is turning from very positive to much less so.

The interplay of these phenomena can be described as the following cause-and-effect (Current Reality Tree [CRT] in TOC terminology) as diagrammed in Fig. 30-1.

One can easily envision what will happen over time, if the Operating Expenses involved in providing service is fixed (if not growing over time), while the revenue it generates only goes down, as in Fig. 30-2.

In the business world, if a product or service shifts from a profit-generating operation into a losing proposition, it must be corrected, abandoned, or replaced by a better one. However, what if such a loss-generating operation happens to be the key to customer satisfaction and loyalty? In many cases, CS is the main driver in future sales to existing customers. In addition, the satisfied existing customers provide references to potential customers.

However, this deterioration of profits, in turn, leads equipment manufacturers to realize that they already face (or, in no time they certainly will) the following dilemma, with no simple solution in sight, as we see in Fig. 30-3.

The Warranty Trap

The initial period of time during which CS is provided, generally free of charge, to the user of the equipment is usually called the warranty period. Warranty is the assurance of the seller to the purchaser that the goods will function properly and shall be as represented. If not, it will be replaced or repaired. It constitutes a part of the purchase contract and must be fulfilled to keep the contract in force.

FIGURE 30-1 CRT of customer support. (Source: Modified from Klapholz and Klarman, 2009, 13.) FIGURE 30-2 The dwindling CS revenue. (Source: Klapholz and Klarman, 2009, 24.) FIGURE 30-3 The dilemma of CS. (Source: Klapholz and Klarman, 2009, 19.) From the viewpoint of the customers, it constitutes a critical component of the value they expect to derive from the purchased equipment or service. However, for the customer service organization, which provides this service (usually) without a charge to the customer for a period of time, it can be a tricky business. Although it is customary to present this in the firm's accounting system as warranty revenues with its associated expenses, and to talk about warranty profitability (or loss thereof), it is not really managed that way from a business point of view.

Warranty revenues are usually a time-proportionate, fixed percentage allocation of equipment sales revenues to CS. It does not reflect the value of the service agreements that will replace it once the warranty expires; it is just an arbitrary allocation-an allocation, not a market price, tested through the market's competitive mechanism.

Warranty expenses are usually "buried" in the overall expenses of CS. It typically covers not just service, but also the installation and training of the user. In addition, the timing of the beginning of the warranty period is often vague, and frequently tends to start long after the shipment of the equipment; sometimes after its installation, often after formal client acceptance. One can only imagine, the faster the product is rushed to the market the bigger the burden of warranty expenses, without any comparable growth in the percentage of revenue allocated to CS.

In addition, one of the "goodies" sales people use to "sweeten" the sales deal is the extension of the warranty period, either free of charge or at minimal cost to the client. This additional burden on CS is rarely (if ever) factored into the business picture.

No wonder that warranty expenses, which in the past were a minor irritation in an overall positive picture, are seen today as a major problem; a problem that casts a dark shadow on the overall CS business situation, which is fast moving from rosy to a very worrisome one.

As we can see in Fig. 30-4, warranty revenues distort (see the core problem in 500) rather than assist the ability to analyze, forecast, or plan warranty's impact on the overall business of CS.

When we add what happens with the warranty to the problems CS already faces (lower prices, greater strain on the resources, shorter product life cycle), the overall business picture of CS becomes even more grim (see Fig. 30-5).

FIGURE 30-4 Warranty CRT. (Source: Klapholz and Klarman, 2009, 47.) So, why not dump CS altogether? Why should the producer take this burden in the first place? True, you hardly can sell anything today without providing proper warranty and service (is watermelon the only thing sold without one?), but why not let the market mechanisms take care of that? The problems lie in the equipment producers' realization that CS is necessary due to its strategic impact on the revenue of the firm, both in the present as well as in the future, as seen in Fig. 30-6.

FIGURE 30-5 The bleak outlook of CS. (Source: Klapholz and Klarman, 2009, 14.) FIGURE 30-6 The business impact of CS. (Source: Klapholz and Klarman, 2009, 14.) FIGURE 30-7 CS as a hostage. (Source: Klapholz and Klarman, 2009, 15.) The bottom line of this situation is an unattainable one; companies in the equipment business are held hostages of their installed base of equipment as in Fig. 30-7.

It is far away from the common wisdom of equipment producers, which for years have seen CS as a reliable "cash cow" of their organizations, immune to the inherent capriciousness of the markets.

What to Change

The basic approach of TOC to problem resolution requires us to start with identification of the core problems-the core drivers behind the rise of the multitude of undesirable effects we endure in the organization.

In order to make sure that the reality picture we portray here, dark as it may be, is an exhaustive one, we must go one step further; let us have a look at the day-to-day relationships between CS and its customers. We should relate to what CS personnel often call the "abuse" of its services by the customers.

In spite of the mantra of any business organization, "The client is always right," nobody knows better than CS that it is not always the case. The CS operational motto is rather, "The client is not always right, but he always is a client." The CS contracts are similar to insurance contracts, promising the insured that when in need, the insurer will provide the technical expertise needed to bring the situation back to normal. Of course, like in any binding contract, there are plenty of details outlining what service clients are entitled to (called Service Level Agreements, or SLAs for short). Nevertheless, the very structure of these contracts leads to a very inefficient operation-from the point of view of the service provider-of the service organization. The most common form of equipment service contract is that called a "full service contract," which provides full coverage, without regard to the effort or expenses involved in providing it. However, unlike in insurance, there are no "deductibles" and "copayments," and there are no discounts to customers with no (or less) claims. It creates an inherently abusive situation, because: The customers have every incentive to call for help, even if the problem is minor and can be solved by them. "The customer is always right" is the slogan that rules here.

So what we face here is a situation in which the revenues (a fixed fraction of the purchase price of the equipment) are controlled by the cutthroat competition between producers and generally decrease with time, while the expenses are an open-ended and mostly increasing proposition.

All that means only one thing: If CS is to refrain from becoming a bottomless pit, relentlessly swallowing the revenue generated in other parts of the organization, it must reinvent itself. The improvement methodology of TOC provides a proven path to achieve this ambitious feat.

The problem is a tremendous one, as it is clear that both preconditions of the dilemma (Fig. 30-3) are truly mutually exclusive: Having good CS; satisfying customers' needs is diametrically opposed to the demand: Ditching the CS ASAP.

What to Change to

The TOC approach calls for a clear visualization of the basic conflict, which prevents the resolution of the core problem. If we realize that good CS is a must, our question isn't whether or not we want to have it, but rather what is needed to change for it to contribute what it should to the firm's overall profitability.

That means that the D' want of the "cloud" in Fig. 30.3, stating "Ditch the CS ASAP" is unacceptable. This, in turn, translates into the question, "How do we make sure profitability remains high (need C), while providing good CS, and satisfying customers' needs (want D)?"

The Evaporating Cloud in Fig. 30-8 shows the inherent conflict between what CS sees as waste (providing unnecessary services), and what its clients regard as their paid-for right, almost a birthright (all services are provided upon request). It stems from both sides of the profitability equation (as the objective A is to increase profitability); increasing the efficiency and effectiveness (need B) by lowering the unnecessary expenses (want D), but still preserving the revenues from service contracts (need C) by providing services clients want.

FIGURE 30-8 The dilemma of CS: what service to provide? (Source: Klapholz and Klarman, 2009, 74.) So how is one capable of providing all services needed by the customer, while refraining from providing what is unnecessary? What change in the existing service providing arrangement could be of value in both the eyes of the service users and the service providers at the same time? How can both sides benefit from it? Let's have a look at the assumptions underlying this chronic dilemma in Fig. 30-8.

A-B

AB1: Efficiency and effectiveness bolsters CS contribution to the company's profitability.

AB2: Efficiency saves time and expenses, thus adding to CS contribution to the company's profitability.

AB3: Effectiveness saves time and expenses by eliminating unnecessary activities, thus contributing to the company's profitability.

AB4: Effectiveness increases Throughput, thus contributing to the company's profitability.

A-C

AC1: A significant part of a company's revenues comes from the renewed service contracts.

AC2: Providing free services hurts the company's profitability.

AC3: Paid-for customer service has a significant impact on the company's profitability.