Doug Guess the CFO with Servigistics, argues that not enough companies increase shareholder value by re-examining underlying costs. Huge savings can be made in service operations by using the old-fashioned experience of family budgeting.

Chief financial officers have responsibility to ensure that the company does more with less in order to deliver increasing value to shareholders. It appears that 'doing more with less' is a common refrain among companies across the globe in the current economic climate. Many of these global companies – whether they are hi-tech or in manufacturing – are struggling to deliver increasing value to shareholders as pressure on profits increases.

Even in the world of domesticity being careful with cash is becoming an increasing priority. I had a conversation with a friend of mine who works in sales for a hi-tech company. His wife has just had their third child. Having chosen to leave her legal career she is now a full-time mum. And now he's feeling the pinch: business is slow and he's not making the commissions or bonuses he anticipated. He's struggling to support his household on what he's making. His wife is talking about going back to work. He's even considered taking a second job to boost the family's income.

That is certainly one way to compensate. But he could also trim his household costs and relieve the pressure on his family's bottom line – its disposable income. As he and his wife began examining their family's spending habits, he realised that in more abundant times he and his family had developed less efficient habits and assumed more was necessary than was actually the case. So they implemented a system of financial priorities and a more disciplined decision-making process regarding what constituted necessary expenses and what didn't.

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In doing so, he realised that he could actually increase his disposable income (bottom line) without increasing his income; common sense of course, but so rarely done effectively.

Doing more with less

So it is with business. Shrinking profit margins means companies need to wring out bottom line cost savings and even more so now than before. And that's the value proposition of strategic service management (SSM). Companies needn't sell more finished goods to increase margins. Instead, they can do just what my friend did – look internally, especially in service operations.

After-sales service is finally being recognised for the strategic issue that it is, and currently ranks among the top three priorities among CFOs worldwide. Indeed, it is production for the after-market where the most waste occurs in the supply chain: end-of-life, new product introductions, failure rates, fill rates, obsolete stock, superseded stock, over-stock, wrong stock in the wrong location, inadequate inventory turns, van stock – the list goes on. Lack of reliable knowledge and visibility results in lost customers and missed opportunities – and, ultimately, lost revenues and profits.

By optimising service parts inventory, proactively managing prices based on anticipated market response, efficiently scheduling and routing service technicians and reducing unnecessary service calls, companies not only significantly reduce overhead costs, but they can also increase profit margins on service. It is the combination of these factors which support an SSM strategy.

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One client, a director at a leading haulage company, complained that due to rising fuel costs, he had to reduce overall spending by around 20%. So how could he possibly invest in strategic service management if his goal was to cut costs? While temporary cuts in discretionary spending and headcount reductions would result in short-term cost savings that most often make a gradual return; investing in permanent improvements in the way businesses deliver on-going services results in long-term cost savings that continue to deliver value long after the initial investment is made.

The proof is in the pudding

Good service is the best sales tool available, so my colleagues in business development tell me. But where's the evidence for this?

According to AMR Research[1] [1], effectively planning and optimising your service parts can:

• Decrease spare parts inventory by up to 66%
• Increase first-time fill rates by up to 26%
• Drive service levels up to 98%

And that is just a part of the puzzle.

On the service technician side, let's say an average service van achieves about 10 mpg (miles per gallon). At £5 per gallon, for argument's sake, the van averages £0.50 per mile. Throw in an additional £0.15 for miscellaneous costs (maintenance, depreciation, etc.) and now you're paying £0.65 per mile for every van in service. If the average fleet vehicle travels about 39,000 miles per year and the average company runs at least 250 vehicles, that'll cost a company over £6m per year. However, optimising the scheduling and routing of technicians - so planning routes and journeys to minimise miles travelled - can save almost one third of those costs, a significant annual saving, not forgetting the reduction in carbon footprint.

A clearer view

To achieve better visibility of the post-sales service operation, whether it is the planning, pricing, workforce or knowledge management element, and to be able to exploit this intelligence to the benefit of both P&L and balance sheet is a strategic imperative. Companies who have dumped the spreadsheet and deployed technology have seen double digit profit improvements, return on investment (ROI) in six months and developed world class sustainable service businesses.

The evidence supporting CFO involvement in a strategic service management framework is clear. This is the key to ensuring that the benefits of service are felt at the bottom line.

If you are in the business of selling a product where margins are being squeezed, a profitable service business can be that step change which puts you head and shoulders above the competition. With predictions of the economic climate getting worse before it gets better, the silver lining is that customers still need service – and they're willing to pay for it.