Hilbrand Rustema of Noventum joins Sarah again to talk about the value and importance of service benchmarking, the best practices for gaining valuable insight, and what trends are most important to gauge against at the moment.

Sarah Nicastro: Welcome to the Future of Field Service podcast. I'm your host Sarah Nicastro. Today we're going to be talking about the importance of benchmarking when it comes to achieving strategic service objectives. We talk a lot on this podcast and within our content on Future of Field Service about all of the change that's taking place in the industry right now, all of the ways in which companies need to be innovating to keep pace with customer expectations and market pressures, and benchmarking can be a very important way to make sure that you are progressing the way you need to be with those objectives.

Sarah Nicastro: So I'm excited to welcome back today Hilbrand Rustema who is partner at Noventum. Hilbrand, welcome back to the podcast.

Hilbrand Rustema: Hi Sarah.

Sarah Nicastro: Thanks for being here. So you may recognize Hilbrand's face. He's been on the podcast a few times and is back today to talk about this topic. So disclaimer, obviously Noventum does benchmarking. So there is that, but regardless of that aspect, it's certainly something that warrants a conversation because it can be a valuable way to understand how you're keeping pace with the change that is being demanded of you. So let's start off Hilbrand just by talking a little bit about the importance of benchmarking for service-based businesses today.

Hilbrand Rustema: Yeah. What I would say is that it's important, particularly for service businesses, to benchmark. I think there are two major areas where every sort of service executive should be using benchmarking. First of all, when you define your service business strategy, you need to set realistic, achievable goals. And therefore it's very useful to know what other similar companies have been doing, are doing in similar stages of their growth and their development so that you set realistic, achievable goals.

Sarah Nicastro: Mm-hmm (affirmative).

Hilbrand Rustema: Now I think that's one area and the second area is looking at what is it that you're really doing? How is your performance currently compared to, of course your strategic objectives, but also compared to the rest of the world and what are similar companies doing? Because-

Sarah Nicastro: Mm-hmm (affirmative).

Hilbrand Rustema: When you set your strategy you typically have at least a medium to long-term view. And in the meantime, lots of things can happen. So if you do some regular, I would say at least once a year, but preferably more often, some benchmarking on how you're doing versus other similar companies, it would give you like a reality check.

Hilbrand Rustema: And that would allow you sometimes to sort of pivot a bit your strategy and to know if it is working what you're-

Sarah Nicastro: Mm-hmm (affirmative) Mm-hmm (affirmative) Yeah. So some folks probably know that in my role with IFS I run a customer group, customer community, and we engage really frequently, twice a month or so. And in some sense it's almost like benchmarking anecdotally versus in a quantitative way, right. And I think there is so much value in the idea of understanding what your peers are up to, right. And so there's instances where I see these light bulb moments in the group of honestly feeling not alone in the struggles, right? So it can be reassuring to see that organizations with similar objectives to yours are struggling in some of the same ways that you are. And then obviously in the group we have a lot of conversations about how to overcome those challenges so that we can kind of build collective knowledge and help share some insights and spark different ideas.

Sarah Nicastro: But then there's also an element of understanding where you may be lagging and kind of getting a little kick in the pants in the right direction when you realize that there might be areas where you are behind the pace of your peers. And so certainly in that group communication type setting, I've seen the value of this type of insight play out in real time. And I think that the idea of putting systems in place to do this regularly and to look at more quantitative data and see things in numbers and charts and graphs and percentages is certainly valuable with all of the objectives that companies are juggling today.

Hilbrand Rustema: I think it's very good that you mentioned that. I think making a distinction between the qualitative and the quantitative benchmarking is a good one because qualitative, like in terms of talking about best practices and how do you solve this issue, is very useful, very valuable, but quantitative, really looking at the financials for example, that has multiple purposes and obviously any well-run business needs to have a clear, good sort of dashboards on how they're performing financially.

Hilbrand Rustema: Currently what we're seeing is that there's a lot of companies that want to go into the data-driven services, the predictive services, more sophisticated services, and they are not so sure what the growth potential is, what the profitability of each type of service is because if you really look at it, there's so many different types of these sophisticated services that go beyond the basic product related services and each has its own sort of business model with different growth and profitability potential that the world is suddenly becoming a lot more complex.

Hilbrand Rustema: And one of the things that I see service leaders also sometimes a bit struggling is to explain to their colleagues, particularly if they're in the manufacturing business, on what the growth opportunity really is or the profit improvement potential really is. And having data that shows, "Hey, these type of companies, or maybe even a very direct competitor, is able to do this and why are we not able to do something similar?" That is also sort of a change management tool.

Sarah Nicastro: Right.

Hilbrand Rustema: It helps you to get the rest of the organization to realize, "Hey, it's real. Others are doing similar things. So we should be able to do that as well."

Hilbrand Rustema: And until you get that realism, many organizations will sort of say, Yeah, yeah. Okay. Let's see and wait." So yeah. There's a very important change management aspect to using benchmarking, the quantitative benchmarking effectively.

Sarah Nicastro: Right. Yeah. I mean, when we talk about topics related to customer experience, customer satisfaction, we always talk about the importance of that balance between qualitative and quantitative insights and it's really the same thing here. It's hugely valuable to sit down in a group of five or six or 10 peers and have a detailed conversation, but it's also incredibly valuable to look at a study and get a quantitative idea of where you are in that journey versus some of the others. And to your point, certainly as it relates to servitization or delivering outcomes, it is a real challenge for some organizations that there is this idea of needing to kind of convince or win over the hearts and minds of some of the folks on the value of that journey and the importance of that journey.

Sarah Nicastro: And certainly in those instances, I think, there is nothing stronger than being able to present some objective quantitative data that's looking at how others are progressing and what benefits they're seeing. So absolutely an important part of being able to convince leadership and convince others within the organization of the why behind a certain direction. Okay. So we've talked a little bit about the importance of benchmarking, the value it can provide. Let's talk about where organizations go wrong. So I guess one thing would be just not doing it or not participating in the act of looking at or doing some benchmarking, but what else kind of prohibits companies from utilizing this type of insight as a good resource?

Hilbrand Rustema: Well to give you an example, looking at profitability of your service business is so insightful or can be so insightful if you use benchmarking in there. One of the things that we see happening right now is that a lot of companies are moving from this preventive maintenance or full service contracts to the predictive services.

Hilbrand Rustema: And obviously that creates enormous value for the end customer because you are improving performance of the equipment, you are reducing maintenance costs. And one of the interesting things that we see happening in the benchmarking that we do is that we see that companies, when they're in this experimental mode almost when they sometimes not have the full value propositions, the new service proposition, the promise to the customer, when they haven't fully developed that, when they don't have a full understanding of what is exactly the value for the customer, they are still saying, "Yeah. It's not completely ready yet." So let's just give that functionality included in the full service contract.

Sarah Nicastro: Mm-hmm (affirmative).

Hilbrand Rustema: And effectively what they're doing then is they're giving a lot of value away-

Sarah Nicastro: Right.

Hilbrand Rustema: For free. And it's amazing how quickly customers get used to that new level of performance.

Sarah Nicastro: Right. It's really cannibalizing the ability to monetize it when you're ready to do that. Like when you've sorted out how you want to do that, then you're really backtracking at that point to say, "Oh. Well, we've been giving you this, but now we've landed on this new offering and so what that looks like is you would pay X for it." And so that is a really big challenge for folks.

Hilbrand Rustema: Yeah. I mean, let me give you one example. I was working with a client the other day that provides street sweeping equipment. And they see several things going on. So obviously they are now able to connect their machines and sort of monitor real time of what's happening with these machines, but also they're electrifying, meaning that that equipment is maybe three thousand parts that were heavily sort of maintenance intensive parts.

Hilbrand Rustema: It goes back to 30 and they see their potential service business, in the current business model, they see it quickly disappearing. And this is the right moment for them to sort of switch over to a totally new business model. So maybe they should be offering the same equipment as a service right now. And as this is not fully crystallized yet in that industry, if you would look at benchmarking data and say, "Okay. Well what is the profitability? What's the growth opportunities for that type of business model versus what we are having right now?" You can say, "Well, okay. It makes sense." But right now the tendency for this type of situation is, "Let's wait and see and well we have another year or two," and then suddenly some competitor shows up and they've done it-

Sarah Nicastro: Right.

Hilbrand Rustema: And you're gone, you're out of the business.

Sarah Nicastro: Yeah. That's a good point. We did a podcast quite a while back with a gentleman who his name is Sae Kwon. He was at Cisco at the time. And it was called weighing the decision of disruption. And it was basically around that conversation. In their instance he was talking about them making the decision to evolve the business before there was any urgency and that sometimes has its own challenges because things are running smoothly, you're successful, and so there's a huge don't rock the boat mentality. But when you see the opportunity to make that change before it becomes kind of dire circumstances, there's a lot of benefit in acting early.

Sarah Nicastro: And so the idea that, the company you're referencing, there's this change that now they have to react to, but that then puts a certain amount of pressure on the time in which they react and the way in which they react, where if you can have a little bit more of a forward thinking or innovative perspective and get ahead of those opportunities, it gives you a little bit more latitude to make that change on your own terms instead of making that change on the industry's terms or the market's terms.

Hilbrand Rustema: Exactly. So you can see several trends and you can benchmark yourself against those trends.

Sarah Nicastro: Right.

Hilbrand Rustema: So you can sort of see it coming rather than just being internally focused and if you just look inside your organization and don't benchmark that much, you would be happy with yourself.

Sarah Nicastro: Right. Right.

Hilbrand Rustema: Yeah. It causes some sort of inaction.

Hilbrand Rustema: The other thing is very often when companies have to make these difficult decisions to quite drastically change their entire business model, they don't know what they're getting into.

Sarah Nicastro: Mm-hmm (affirmative).

Hilbrand Rustema: If you are able to look at benchmark data of similar companies that may not have the same product, but at least they have a similar business model that you are aspiring to you can kind of see what to expect there and that facilitates the decision-making because without facts, usually the senior executives are not willing to make any decision at all.

Sarah Nicastro: Mm-hmm (affirmative) That makes sense. So I think you've touched on a few, but just to sort of recap or add anything to the list, what are some of the biggest trends or areas right now that you think organizations should be benchmarking against? And obviously I'm referring to organizations that would be the folks listening to this podcast, which are very similar to the types of organizations that Noventum works with. So what are some of the biggest areas that you would suggest companies be investing time and effort into benchmarking on and paying attention to?

Hilbrand Rustema: So, first of all, I would benchmark the type of service revenue that you are into. So if you just throw all the service revenue on one big pile and you see growth and you're happy with that, usually you have a distorted picture.

Hilbrand Rustema: So you have to try and distinguish between well-established types of service revenue. Like be it parts, be it preventive maintenance contracts, full service contracts, preventive maintenance contracts, or even go beyond that. So what we always call the customer business related services. So process optimization type of services can be outcome-based or as a service business models where you have the equipment, you may finance the whole equipment as well, managed services, business process outsourcing, or the real data-driven type of services where you have maybe in that category alone, you can already have sort of 10 sub categories. So trying to look at the type of service revenue and see where you are growing, where you're not growing.

Hilbrand Rustema: And then perhaps if you have that ability to look at what are your customers doing and which type of customers are the most profitable ones as a result of different types of revenues that they are consuming or what they're spending their money on.

Sarah Nicastro: Mm-hmm (affirmative).

Hilbrand Rustema: And then the second area is the profitability. So if you can distinguish between the different types of service revenue in your own accounting systems or even if it is by approximation, that's also pretty good already, then you can look at what are gross margins for each of these types of services. And what are the trends that you see there?

Sarah Nicastro: Mm-hmm (affirmative).

Hilbrand Rustema: One of our recent studies showed that most service executives, they expect not to see any growth in the purely product related service revenues in the coming three to five years. So that means that, "Okay. It goes beyond product related service revenue." So what should they be looking at? What type of business model, what type of service revenue will be the right one for them to focus on and what is the expected growth of that and the profitability?

Sarah Nicastro: Mm-hmm (affirmative).

Hilbrand Rustema: So you may come to a conclusion, particularly in a highly digitalized world where sometimes the leaders of the back, it's a winner takes all model in many industries. So you have to try and look ahead, look at the trends, and look at revenue, profitability, and the growth rates. And I think if you are able to do that as a service leader, you're in a pretty good position, you can avoid a lot of nasty surprises.

Sarah Nicastro: Mm-hmm (affirmative) Yep. Okay. So last question is around what are the best practices? So what's your advice for folks on, we've talked about the importance of benchmarking and some of the areas that people need to be paying attention to. How do they benchmark and make sure they're benchmarking well?

Hilbrand Rustema: Well first of all, inside your organization you need to be able that you compare apples with apples. So most, let's say professional service organizations, they have their accounting principles standardized across the globe so that the different types of revenues are clearly defined and recorded in that way. And profitability is a result of cost allocation and recognition in the right way. So I think that's sort of the basis for the financial type of benchmarking.

Hilbrand Rustema: Then I would say you need to find reliable sources of that benchmark data. I know it's hard. So the choices basically are you can identify a couple of companies that are similar enough. Usually your direct competitors don't want to benchmark with you or they're not allowed to, but you can identify a couple of companies and that's one of the things that we do as Noventum. You work with a consulting firm that has the research capability, that has the benchmark data available in a sort of statistically validated way so that there's a quality check on that data.

Sarah Nicastro: Mm-hmm (affirmative).

Hilbrand Rustema: Another important best practice I would say is not only to benchmark at, let's say the headquarter level, throw everything in one big bucket and benchmark at that level. No. Also try to, if you're a multi-national, try to benchmark the individual country or regional operations.

Hilbrand Rustema: And you may find lots of interesting differences there and then figure out why is one country performing very well in one particular area and why is another country doing in another area much better? So that gives you the opportunities to benchmark internally, which is probably the best quality of benchmark data that you can get if you do that internally. So another best practice is to not fall into the trap of wanting only to benchmark within your industry.

Hilbrand Rustema: What we've found in our benchmarking database, if you look at it statistically, there is no correlation very often between different players in one industry because they are in a totally different level of maturity of the service business. What we've found is it doesn't matter what is the type of equipment that you service, it's more what is the business model that you have?

Sarah Nicastro: Right.

Hilbrand Rustema: And so to make sure that you have a peer group of similar companies that fulfill certain requirements, such as obviously size, but maturity level, the type of services. It is more important than trying to benchmark with only your industry peers.

Hilbrand Rustema: Because if you do that by definition you may run behind, whereas you can learn so much from other industries, which may be further ahead than your own industry in terms of the service business.

Sarah Nicastro: Yeah. And I think that's an important point is a lot of the advanced service type offerings that we talk about, they are, at a macro level, the same, industry to industry or similar enough. And so I think this idea of only looking within your industry at what's happening and what the trends are and what companies are doing and what customers want, you could lead your industry, but still be behind in terms of really where the future of services going.

Sarah Nicastro: And so I think most companies have embraced that fact and find a lot of value in looking for inspiration and innovation ideas outside of their industry, but it's certainly an important point. I always say, so going back to the group that I run, you're talking about companies in different industries, across the world, and we have so many good conversations and I always say like there's no one in this group that can create you a map of where you need to go and how to get there.

Sarah Nicastro: But by having those conversations, by exposing yourself to what others are doing and how others are thinking, it gives you a lot of opportunity to spark different ideas that can lead to immense positive change within your business. So I think it's a really important point that when you're looking at how to innovate, it's valuable to take inspiration from other industries, even industries super different than yours. I mean, that's how those disruptive ideas happen, not by kind of sticking close to home and playing it safe.

Hilbrand Rustema: Yeah.

Sarah Nicastro: Makes sense.

Hilbrand Rustema: So what you're saying here is obviously a mix of quantitative financial benchmarking and qualitative. And I would say another best practice perhaps if I come back to the question is start with the financial benchmarking and then you will identify certain areas of improvement. And then go into the qualitative benchmarking, look at service industry standards, look at the best practices. There are many out there obviously. So in that approach and try to look at statistically validated information rather than anecdotal.

Sarah Nicastro: Right. Right. Alright. So as it happens, not coincidentally, but intentionally, there is a benchmarking project that you have underway. So tell folks about that and who is a fit to participate, how they can participate, and where they can participate?

Hilbrand Rustema: Yeah. So at the moment we're running a large benchmark project, which is open to any, let's say, manufacturing company interested in growing their service business. That's the name of the project. So it's called the 2021 service growth benchmark. You can have a look anybody's interested in that and finds it valuable to participate in such a benchmark. You can have a look at our landing page for that is called thefutureofservice.com. So thefutureofservice.com. Companies can participate by filling out a survey. It's a database. It collects data until the end of September, then it will be closed. Then all participants will get an automatically generated benchmark report. And we do that by, or the system does it, by indeed creating peer groups of similar companies, pretty much according to maturity level, sizes, et cetera. And then you get an individual benchmark report.

Hilbrand Rustema: And depending on how much data you have actually filled out, you will get back on the parts of the survey that you have actually entered data in. It's free of charge and there will be a number of executive round tables organized. So to get sort of the story behind the results that we'll see. So we will be inviting some of the companies that have remarkable results and we'll invite them to talk about that. And then in small groups, 15 people or so, we will discuss the outcome by peer group. And that is more the qualitative part as you were mentioning, Sarah. And yeah. It gets a story behind the numbers.

Sarah Nicastro: Okay.

Hilbrand Rustema: And then the project will end with sort of a full report, which we expect to publish in January next year. That should give a pretty in-depth insight in the biggest trends and some of the best practices of the most successful companies.

Sarah Nicastro: Okay. Good. Well I urge anyone that is listening that is in the manufacturing space to check it out. So we are future of field service. This is the future of service. So that could get a little confusing, but we'll make sure we put it in the show notes. I mean, you all know that I'm a huge, huge fan of the idea of pure perspective and the voice of the industry and understanding what is happening across the space and this is certainly a really helpful way to get a view of what the trends are and where you sit amidst the trends. So definitely participate and maybe in January Hilbrand, we'll have you back to talk about some of the findings and share with folks what the trends are for those that participated. But I appreciate you coming on today to talk a bit about the importance of this and to share the project with everyone.

Hilbrand Rustema: Yeah. Well thanks a lot, Sarah. For sure we'll be back in January when we have the report.

Sarah Nicastro: Sounds good! If you'd like to participate, that is thefutureofservice.com. Not to be confused with futureoffieldservice.com, which is where you can find more of our content. You can also find us on LinkedIn as well as Twitter at The Future of FS. The Future of Field Service podcast is published in partnership with IFS. You can learn more at ifs.com. As always, thank you for listening.