Service contract practices

The author is responsible for the content of this report. Copyright © 2006 Drachten. This publication may not be reproduced or photocopied in whole or in part without formal permission of the author.

Service contract practices

(Public version)

Niels Buiter

April 2006

The author is responsible for the content of this report. Copyright © 2006 Drachten. This publication may not be reproduced or photocopied in whole or in part without formal permission of the author.

Master Thesis Business Administration Specialization in Business Development University of Groningen

Author: Niels Buiter

Student number: 1418742

Initiator: Neopost Technologies BV First Supervisor University: dr. J. Kratzer

Second supervisor University: dr. ir. M.C. Achterkamp Supervisors Neopost Technologies BV: drs. ing. W.J. Mulder

ir. A.R. Waalkens Drachten, April

²⁰⁰⁶

NEOPOST TECHNOLOGIES BV PO BOX 20

9200 AA DRACHTEN - THE NETHERLANDS TELEPHONE: + 31 (0) 512 589 300 FAX: + 33 (0) 512 589 399

University Groningen

FACULTY OF MANAGEMENT & ORGANISATION PO BOX 800

9700 AV GRONINGEN – THE NETHERLANDS TELEPHONE: + 31 (0) 50 363 3822 FAX: + 33 (0) 50 363 3850

Service contract practices

“A comparative case-study on service contract practices for document systems within the Neopost Group”

FOREWORD

This thesis is the result of a research on service contract practices for document systems within the Neopost Group. This research was conducted in pursuance of my study in Management and Organisation (specialisation in Business Development) at the University of Groningen, The Netherlands. This thesis would not have been completed without the support and enthusiasm of a number of people; I would like to thank them here.

First of all, I would like to thank the whole IPSS team of Neopost Technologies BV and the OpCo Service Directors for their support and enthusiasm. Moreover, I would like to thank my colleagues Harco Landmeter, Willem Jan Mulder, Arwin Waalkens, Andy Hall (R&D) and Hans van Wijk for accompanying me on my research trips to Paris, London, Munich and San Francisco. A special gratitude goes out to Willem Jan Mulder and Arwin Waalkens for their support, supervision, discussions and enthusiasm during the research project.

I would like to express special gratitude to my supervisor at the University of Groningen, dr. J. Kratzer, for his supervision and feedback during my research project. Furthermore, I would like to thank dr. ir. M.C. Achterkamp for co-supervising my research project during the end phase of the project.

Moreover, I would like to show special gratitude to my father (

^†

August 16

^th

, 1993) and my mother for their everlasting support and believe in my capabilities.

Lastly, I would like to thank my girlfriend, Riejanna Pruim, for her love, support and of course her patience. I can imagine that it was (and is) not always easy to live with a self- willed guy like me, especially during the final months of my graduation.

Niels Buiter, April 2006.

MANAGEMENT SUMMARY

Rationales and objectives for this research

The management of IPSS (NTBV) initiated this research because they wanted an extensive description (differences and similarities) of the service contract practices within the Neopost Group.

Furthermore, they wanted an identification of (“best”) practices that seemingly have a positive influence on the performance of service contracts. The main objective of this research was:

To provide the management of IPSS with knowledge about current service contract practices for Neopost document systems and to provide knowledge about service contract practices that seemingly have a positive influence on service (contract) performance in virtue of a thorough description and analysis of current service contract practices within the Neopost Group.

This objective is from the IPSS perspective, as IPSS is the initiator of this research. However, a second (sub) objective was stated for the Neopost OpCo’s, as they will receive the results too. The second objective for this research was:

To provide the OpCo’s with knowledge about service contract practices of other OpCo’s to induce ideas that might be useful to improve the performance of their own service (contract) practices.

Main research questions

Two main research questions were formulated. Research question 1 was:

What are the differences and similarities between the current service contract practices for document systems within the Neopost Group OpCo’s?

Research question 2 was:

Which service contract practices for document systems within the Neopost Group OpCo’s have a positive influence on the performance of service (contracts)?

Conclusions

Research question 1:

Research question 1 was answered by using several documents about service contracts.

Furthermore, the participating OpCo’s were visited and the OpCo Service Directors were interviewed face-to-face in a semi-structured way.

Taking all the gathered data in consideration a major distinction can be made between the service contracts. There are volume-based and factory specification-based contracts. The first mentioned contracts limit the customer on specifications of the machine and volume; the latter limit the customer on factory specification only.

Scope of services XXX Terms & conditions

XXX Product Market Combinations XXX Management of service contracts XXX

Research question 2:

The second research question was answered by using a rating scale. The researcher, together with

the management of IPSS and the interviewed Service Directors, applied these ratings (-3, -2, -1,

0, +1, +2 and +3) to the different service contract practices. Practices with a rating of +2 and

higher were defined as “best” practices. The following practices were identified as “best” practices:

Recommendations

In sum, the following recommendations were formulated:

•

XXX

CONTENTS

FOREWORD

MANAGEMENT SUMMARY

1 INTRODUCTION ... 8

1.1 NEOPOST VALUES YOUR MAIL... 8

1.2 NEOPOST TECHNOLOGIES BV... 9

1.2.1 PRODUCTS & SERVICES... 9

1.2.2 CUSTOMERS... 9

1.2.2.1 MAIL VOLUME SEGMENTATION... 9

1.2.2.2 MAIL TYPE SEGMENTATION... 10

1.2.2.3 CUSTOMER NEEDS SEGMENTATION... 10

1.2.2.4 BAIN SEGMENTATION... 10

1.3

R

ATIONALES FOR THIS RESEARCH

...10

1.4 O

UTLINE OF THE REPORT

...10

1.4.1 PRELIMINARY RESEARCH... 11

1.4.2 EMPIRICAL RESEARCH... 11

1.4.3 CONCLUSIONS & RECOMMENDATIONS... 11

Part A Preliminary research 2 LITERATURE REVIEW...13

2.1 R

ATIONALES FOR PROVIDING COMPLEMENTARY SERVICES

...13

2.2 K

EY ACTIVITIES IN CUSTOMER SUPPORT

...14

2.3 R

ATIONALES FOR USING SERVICE CONTRACTS

...14

2.3.1 COMMUNICATION TOOL... 15

2.3.2 EXPECTATIONS MANAGING TOOL... 15

2.3.3 CONFLICT REDUCTION TOOL... 15

2.3.4 LIVING DOCUMENT... 15

2.3.5 OBJECTIVE PROCESS FOR GAUGING SERVICE EFFECTIVENESS... 15

2.4 C

ONTENT OF SERVICE CONTRACTS

...15

2.4.1 PARTIES TO THE AGREEMENT... 15

2.4.2 TERM... 15

2.4.3 SCOPE... 16

2.4.4 LIMITATIONS... 16

2.4.5 SERVICE LEVEL OBJECTIVES... 16

2.4.6 SERVICE LEVEL INDICATORS... 16

2.4.7 NON-PERFORMANCE... 16

2.4.8 OPTIONAL SERVICES... 16

2.4.9 EXCLUSIONS... 16

2.4.10 REPORTING... 16

2.4.11 ADMINISTRATION... 17

2.4.12 REVIEWS... 17

2.4.13 REVISIONS... 17

2.4.14 A^PPROVALS... 17

2.5 P

OINTS OF INTEREST WHEN DEFINING SERVICE CONTRACTS

...17

2.5.1 CLEARLY DEFINING SCHEDULED MAINTENANCE... 17

2.5.2 DEFINING EXTRA WORK... 18

2.5.3 APPROPRIATELY ALLOCATING PROLONGED START-UP RISKS... 18

2.5.4 PROTECTING OWNER INTERESTS... 18

2.5.5 CLARIFYING RESPONSIBILITIES... 18

2.5.6 EARLY SERVICE AGREEMENT CANCELLATION ... 18

2.5.7 EXTENDED END-^OF-TERM PARTS LIFE WARRANTY... 18

2.5.8 THE ABSURDLY LONG SERVICE AGREEMENT... 18

2.5.9 LIQUIDATED DAMAGES FOR TERMINATION... 19

2.5.10 LIMITATIONS OF LIABILITY AND EXCEPTIONS... 19

2.5.11 COST MANAGEMENT... 19

2.6 C

ONCLUDING REMARKS

...19

Part B Empirical research 3 RESEARCH METHODOLOGY...22

3.1 T

HEORETICAL CONCEPTS AND MODEL

...22

3.2 P

ROBLEM STATEMENT

...23

3.2.1 RESEARCH OBJECTIVES... 23

3.2.2 MAIN RESEARCH QUESTIONS... 23

3.2.3 SUB RESEARCH QUESTIONS... 24

3.2.4 PRECONDITIONS... 24

3.3 S

OURCES OF DATA

...24

3.3.1 PRELIMINARY RESEARCH... 24

3.3.1.1 LITERATURE... 24

3.3.1.2 DOCUMENTS... 24

3.3.1.3 MEDIA... 25

3.3.1.4 PERSONS... 25

3.3.2 EMPIRICAL RESEARCH... 25

3.3.2.1 DOCUMENTS... 25

3.3.2.2 P^ERSONS... 25

3.4 MEASURING AND OBSERVING METHODS... 25

3.5 METHODS FOR ANALYSIS... 26

3.5.1 QUALITATIVE ANALYSIS... 26

3.5.1.1 DATA REDUCTION... 27

3.5.1.2 DATA DISPLAY... 27

3.5.1.3 CONCLUSION DRAWING AND VERIFICATION... 27

4 RESULTS AND ANALYSIS ... 29

4.1 SIMILARITIES, DIFFERENCES AND “BEST” PRACTICES... 29

4.1.1 SCOPE OF SERVICES... 29

4.1.1.1 DELIVER... 29

4.1.1.2 USE... 29

4.1.1.3 DECOMMISSION... 30

4.1.2 TERMS & CONDITIONS... 30

4.1.2.1 OBJECTIVES & INDICATORS... 30

4.1.2.2 L^IMITATIONS... 30

4.1.2.3 TERM... 30

4.1.2.4 NON-PERFORMANCE... 30

4.1.2.5 EXCLUSIONS... 30

4.1.2.6 OPTIONAL SERVICES... 30

4.1.3 PRODUCT MARKET COMBINATIONS... 30

4.1.4 MANAGEMENT OF SERVICE CONTRACTS... 31

Part C Conclusions & recommendations

5 CONCLUSIONS & RECOMMENDATIONS ...33

5.1

^MAIN CONCLUSIONS... 33

5.1.1 RESEARCH QUESTION 1 ... 33

5.1.1.1 SCOPE OF SERVICES... 33

5.1.1.2 TERMS & CONDITIONS... 33

5.1.1.3 PRODUCT MARKET COMBINATIONS... 33

5.1.1.4 MANAGEMENT OF SERVICE CONTRACTS... 33

5.1.2 RESEARCH QUESTION 2 ... 33

5.2 REFLECTION AND DISCUSSION... 34

5.2.1 F

EASIBILITY OF THE RESEARCH OBJECTIVES

... 34

5.2.2 L

IMITATIONS OF THE CONDUCTED RESEARCH

... 35

5.3 RECOMMENDATIONS FOR NEOPOST... 35

5.4 RECOMMENDATIONS FOR FURTHER RESEARCH... 35

LIST OF REFERENCES... 37 APPENDIX I ORGANISATION CHART NEOPOST GROUP

APPENDIX II CUSTOMER SEGMENTATION CRITERIA

APPENDIX III LETTER TO SERVICE DIRECTORS NEOPOST GROUP OPCO'S

APPENDIX IV SEMI-STRUCTURED INTERVIEW

APPENDIX V SERVICE CONTRACT MATRICES

APPENDIX VI OPCO SERVICE CONTRACT DESCRIPTIONS

1 INTRODUCTION

Today, it is hard to find a company that sells its products on basis of a “take it, or leave it” mentality. Most companies are trying hard to clearly define both the capabilities and limitations of the products they are producing and selling (Jander, Morris & Sturm, 2000). For industrial products and complex products in particular, complementary services are provided to the core product (Lovelock & Wirtz, 2004). These services go by the names of, amongst others: customer support, service support, technical service support, after-sales services or just service. In sum, these services exist to make sure that the customer has the availability of the product without (to many) problems.

For manufacturers of industrial products it is common practice to determine these services in a service contract. These service contracts determine the level of service a customer receives during the determined term of the contract.

This report is about a research on service contract practices of the international Neopost sales and services organizations (Hereafter: OpCo’s) for Neopost document systems, conducted from October 2005 through April 2006. This introductory chapter provides a description of the Neopost organization and how the described aspects of the organization relate to the conducted research (context). Furthermore it describes the rationales behind the research project.

1.1 Neopost values your mail

¹

The Neopost Group ranks number one in Europe and number two in the world in mailroom equipment and logistics systems. The Group sells mailing, document and logistics systems and provides customized mail processing solutions covering both letters and parcels to a wide range of customers in the corporate, public and professional sectors. The company offers the most advanced solutions for online and off-line postage, large volume mail insertions, occasional parcel delivery and logistics management and trace ability.

Neopost employs about 4.500 people in 13 countries around the world (amongst others:

Canada, The Netherlands, Norway, Belgium, France, USA, Germany and Ireland) and realised a total sales of €756 millions in 2004

²

. Neopost products are sold in over 90 countries and are used by over 800.000 customers in varying businesses.

The Neopost Group organisation chart (see appendix I) shows a mixed functional and geographical organisation. The Neopost OpCo’s are divided in a European region and a North America & Japan region. The OpCo’s in the different countries sell and service all products in the Neopost range, but only the service contracts of the Neopost document system product range were of importance in the conducted research. The document systems are produced by Neopost Technologies BV (Hereafter: NTBV). NTBV is part of the industrial branch within the Neopost corporate partnerships (see appendix I).

1 Mainly based on Neopost Group Intranet, 2005.

2 Neopost Group annual report, 2004.

1.2 Neopost Technologies BV

NTBV develops, distributes and produces document systems for folding, inserting and opening documents and envelopes. The document systems are marketed in over 90 countries worldwide through 13 Neopost OpCo’s

³

and numerous dealers.

1.2.1 Products & services

The Neopost document systems, which are used by a wide variety of companies in a wide variety of businesses, can be subdivided into horizontal and vertical systems. Horizontal systems are high-end systems for high volumes (Around 100.000 documents per month). Vertical systems are mid-range to high-end systems for medium to high volumes (roughly between 3.000 and 70.000 documents per month).

Current (January 2006) horizontal document systems are the SI-78 and the SI-92.

Vertical systems include the following product types: SI-30, SI-62, SI-68, SI-76 and the SI-82. There is no use in describing these machines in detail, but it is important to realise that there are differences between the machines that make that different service levels may be required. The SI-92, for instance, is the current flagship of the Neopost document system range and the most complex machine. The SI-92 needs different service levels compared to other machines in the document system range. A SI-92 customer needs dedicated training to operate the machine, for instance. The operator training for the SI-30 is less extensive because the product is less complex. Furthermore, higher volumes usually result in more maintenance, because parts wear faster. So the differences in the complexity and capacity of the product have consequences for the service needs and thus service contracts. Table 1.1 shows the product portfolio of Neopost and the customer profile of each machine.

Horizontal Customer profile Machine location

SI-92 SI-78

XXX XXX

XXX XXX

Vertical Customer profile Machine location

SI-82 SI-76 SI-68 SI-62 SI-30

XXX XXX XXX XXX XXX

XXX XXX XXX XXX XXX

So besides selling core products (Lovelock & Wirtz, 2004) the OpCo’s provide several services. These services, which are often determined in a service contract, exist mainly to care for the availability (uptime) of the machine to the customer and are an indispensable part of the Neopost offer. The services that OpCo’s offer consists of, amongst others: preventive and corrective maintenance, user training and documentation.

1.2.2 Customers

1.2.2.1 segmentation

The first segmentation criterion is based on.

3Neopost France, Satas (France), Neopost Ireland, Neopost Italy, Neopost Norway, Neopost USA, Neopost UK, Neopost The Netherlands, Neopost Belgium, Hasler Inc. (USA), Neopost Japan, Neopost Germany and Neopost Canada.

Table 1.1:

1.2.2.2 segmentation The segmentation is based on.

1.2.2.3 segmentation 1.2.2.4 segmentation

The description of the segmentation criteria makes clear that different customer needs should be considered in the offer. Not just in the core product (Lovelock & Wirtz, 2004) offer but also in the complementary services. That is why these segmentation criteria were taken in consideration throughout the research. The segmentation criteria were used to describe to what extent the OpCo’s take the different customer characteristics in consideration in their service contracts (Product Market Combinations).

1.3 Rationales for this research

The description of the Neopost organisation clearly shows that, besides the document system products, services are of great importance. In addition to high quality goods, Neopost wants to offer high quality services. The Neopost OpCo’s are responsible for providing these services to their customers. The level of service a customer receives depends more or less on the service contract that is determined between the Neopost OpCo and the customer.

The management of the IPSS department (NTBV) was the initiator of this research. They initiated this research because they wanted an extensive description of current service contract practices within the Neopost Group. Furthermore, they wanted an identification of “best” practices in service contracting. “Best” practices are defined as practices that seemingly have a positive influence on the performance of service (contracts)

⁴

. A service contract practice has a positive influence on performance when it decreases service costs (higher profitability) and/ or increases customer satisfaction (higher uptime). There are two main reasons that form the basis of the initiation.

The first reason was that the management of IPSS believes that the current service contracts of the Neopost OpCo’s may prove inadequate for forthcoming NTBV products.

Another ground for carrying out this research was that the management of IPSS believes that the profitability of service (contracts) of current NTBV products could be increased.

So the management of IPSS dare says that a thorough description of the current service contract practices and the identification of “best” practices can help to create ideas (Within NTBV and within the Neopost Group as a whole) for the development of service contracts for forthcoming NTBV products and to create ideas on how to improve the profitability of service (contracts).

1.4 Outline of the report

This report is structured around three parts (A, B and C): preliminary research, empirical research and conclusions & recommendations.

4“Contracts” is placed in parenthesis because the definition and execution of a service contract can have a positive influence on the performance of service contracts, but also on the service performance in general.

1.4.1 Preliminary research

In order to determine the concepts for this research it was essential to review scientific literature first, the next chapter describes the literature review. The literature review provided better insights in service contracting and made it possible to conceptualise the research and to formulate specific questions for the empirical research.

1.4.2 Empirical research

Chapter three provides a description of the research design and the used methodological concepts. Chapter four describes the results of the empirical research together with an analysis of these results.

1.4.3 Conclusions & recommendations

Chapter five expresses the main conclusions of this research and provides

recommendations for Neopost. Chapter five also provides recommendations for further

research and a reflection and discussion on the conducted research.

Part A

Preliminary research -

2 LITERATURE REVIEW

This chapter provides a description about service support and service contracts in particular. At the beginning of the research there was no ready-made research design for service contract research at hand. Consequently, preliminary research was necessary to gain a better understanding of service practices and to identify key concepts to be addressed in the research on Neopost service contract practices. Starting point of the literature review were the concepts of service support and service contracts.

The first paragraph describes the rationales for providing complementary services, followed by a paragraph about the kind of services that are provided. Service support is seen as the context in which service contracts “exist”. That is why this is described first.

After the general introduction in service support the focus will converge to service contract practices in paragraph 2.3 and further.

2.1 Rationales for providing complementary services

Very often manufacturers see service as a necessary evil. It just exists to keep machines (products) up and running (Kumar, Kumar, Markeset, 2004). However, the provision of complementary services offers several advantages that form the rationales for providing them.

Basically, there are four main rationales for manufacturers to provide complementary services. First of all, it is essential in achieving customer satisfaction. Services can prevent that machines break down and thus increases uptime of the product, which results in a more satisfied customer (Goffin & New, 2001). Secondly, it can provide a competitive advantage. Goffin & Bennekom (2002) assert that by identifying issues for supportability and incorporating these issues in the development process of new products, the service to customers can maximize customer’s total net benefit of product ownership. By maximizing a customer’s total net benefit using services, a company creates a competitive advantage.

Thirdly, complementary services play a role in the success rate of new products (Goffin &

New, 2001). When developing new products, the maintenance requirements and possibilities need to be considered. Decisions that are made in the design stage of new products have a great influence on the maintenance requirements. When the research and development department have knowledge about the requirements for maintenance and the capabilities of the service department they can consider these in the development process, which consequently can lead to better machines and better serviceability (Goffin & New, 2001).

Finally, it can be a major source of revenue (Goffin, 1999). Service has become a key source of revenue for companies nowadays and it can be very profitable. A study by McKinsey concluded that in most industrial companies, the after-sales business accounts for 10 to 20 percent of revenues and a much larger portion of total contribution margin (Goffin & Bennekom, 2002). Apart from that, it is also a steady stream of revenues, since contract revenue generates an annuity or subscription type of revenue stream (Goffin &

Bennekom, 2002).

Apart from these four rationales, complementary services have to be provided to

overcome weaknesses in the product that are impossible to design out because of

research and development constraints (Kumar et al., 2004).

The descriptions above show that there are enough reasons for manufacturers to provide complementary services. The next paragraph describes the activities in customer support to gain more insights in which services are provided.

2.2 Key activities in customer support

There are several activities included in the service process. Kumar et al. (2004) name several: providing field service, providing remote diagnostics, assisting the customer during installation, etc. Overall, it is possible to identify a number of main elements in industrial customer service.

Goffin & Bennekom (2002) developed a Customer Use Cycle to identify key steps in the service delivery process. It consists of five phases; deliver, use, maintain, supplement and decommission. Even though it consists of five phases, three main phases can be identified because use, maintain and supplement are all services that are performed during the use of a product. The three phases are graphically displayed in figure 2.1.

Below the phases, frequently offered services (not exhaustive) are stated. Many of these services typically serve as the means of rectifying or compensating for flaws in the core product.

The service activities that are part of the Customer Use Cycle are typical after sales services. After the sale of a product it needs to be delivered to the customer. For the more complex products this often means that the machine needs to be installed and configured. During the use of the product several services can be provided. Training, for instance, is important for complex products because it can decrease downtime and engineer interventions. Moreover, maintenance activities, in the broadest sense of the word, are important during the use of a product. The decommission phase takes care of a sound disposal or replacement of the product (Goffin & Bennekom, 2002).

The service activities mentioned above are often defined in a service contract. A general introduction in service support was needed to understand the content of service contracts, which is described in more detail in the following paragraphs.

2.3 Rationales for using service contracts

In the service management theory the service contract is seen as the central point in managing the service level (Sturm et al., 2000). There are several reasons for companies to establish service contracts. Karten (2001) identifies five functions of the service agreement: communication tool, expectations managing tool, conflict reduction tool,

Deliver Use

Decommission

• Install

• Implement

• Configure

• Train

• Support

• Documentation

• Repair

• Clean

• Refill

• Update

• Dispose

• Replace

• Transition

Figure 2.1: Customer Use Cycle (Originated from Goffin & Bennekom, 2002)

living document, objective process for gauging service effectiveness. These functions are described in more detail below.

2.3.1 Communication tool

With the establishment of an agreement between the customer and manufacturer the communication between them is being strengthened, so that the parties understand their needs, priorities and concerns. In that way, the contract serves as a communication tool.

2.3.2 Expectations managing tool

During the negotiation of a service contract both parties can identify and discuss about their expectations for services to be provided. This shared understanding of the expectations can prevent problems in the future. So the service contract is an expectations managing tool too.

2.3.3 Conflict reduction tool

As a consequence of not having a shared understanding of expectations, needs, priorities, etc. conflicts could arise. A service agreement can prevent such conflicts or can solve conflicts, if they arise, more easily.

2.3.4 Living document

The service contract acknowledges that changes in the contract may be necessary because of changing circumstances. Changes in laws, for example.

2.3.5 Objective process for gauging service effectiveness

In absence of a service contract both parties may disagree about the adequacy of the services provided. The establishment of a service contract prevents this issue.

The described reasons for using service contracts show that service contracts can prevent problems between manufacturer and customer. This can only be accomplished though, if the service contracts are defined accurately. The next paragraph describes which parts need to be considered in a service contract.

2.4 Content of service contracts

Naturally, service contracts differ greatly in their content. This depends on several factors such as customer preferences, capabilities of service provider, etc. The basic structure, however, is more or less the same for every service contract. This paragraph describes the content of a service contract. The descriptions are mainly based on Strum et al.

(2000).

2.4.1 Parties to the agreement

It goes without saying that the agreement should state the parties involved in the service contract. Usually there are two parties involved, the receiver of the service (Customer) and the provider of the services (e.g. manufacturer). Third party agreements are possible too.

2.4.2 Term

The term of the service contract differs. However, most companies use the technical lifecycle as a criterion for determining the term of the contract. For IT products the term is usually very short (e.g. two years) because of rapid changes in the industry and developments in the product. Contracts of products that have a longer lifecycle (e.g.

copiers) usually have longer terms.

2.4.3 Scope

This section defines the services that are covered by the agreement. It thus describes the kind of services that were described in paragraph 2.2. The scope only defines the content of the services, not which level of service is required.

2.4.4 Limitations

The limitations area can be seen as the caveat clause of the service contract. Typical limitations are volume (e.g. above 10.000 items the services will be invoiced separately), topology (e.g. location of facilities to which the services are delivered), etc. During the determination of the service contract a manufacturer needs to understand what the capabilities are for the service provision. Without limitations these capabilities may be abundantly exceeded.

2.4.5 Service level objectives

The service level objectives state the agreed upon levels of service. These could include things like: response time, availability, etc. Ideally, there should be an objective for every service activity covered by the contract. In some cases it can be desirable to define two levels of objectives. The first will be the minimum level of service still considered acceptable. The second one is a stretch objective, it is a desirable level of service but it is not guaranteed. The second objective is optional.

2.4.6 Service level indicators

One of the criteria of service level objectives is that it needs to be measurable.

Something must be measured to indicate the level of service provided. For services this is no sinecure. Services are intangible and therefore difficult to measure. Therefore, it is important to identify indicators which both parties agree on and which represents the defined service objectives. A widely used service level indicator is response time and availability rate.

2.4.7 Non-performance

The limitations section can be seen as the caveat section of the service contract. In the non-performance section the consequences of these limitations are stated. If the service provider or customer fails to meet the commitments, the agreement should include penalties for this misconduct. The main purpose of the non-performance section is not to compensate for bad service but to give good incentive to provide the agreed services.

2.4.8 Optional services

Some services may not be provided in a normal situation or are not provided at this time.

For instance, a customer’s shop is closed on Sundays but in the future it might be open on Sundays. Consequently it might need services on Sundays in the future but not at present. This kind of options should be included in the service contract. Another example is extra user training during use of a machine or moving services.

2.4.9 Exclusions

This section contains services that are not included in the service contract. Some common sense is needed in this section to prevent that there are to many exclusions and that the contract is becoming a tumble of exceptions and hard to understand.

2.4.10 Reporting

The process of service provision needs to be reported. Otherwise the service contract is

merely a statement of good intentions. Without reporting it is impossible to conclude

whether the actual provided services are up to agreement. It speaks for itself that the

reports need to reflect the service level objectives and service level indicators.

The service agreement should state which reports will be provided and when they will be provided. These reports describe the service delivery in detail and whether it is up to the levels of agreement or that it might need some improvements.

2.4.11 Administration

This section describes the ongoing administration of the service contract and the process that it specifies. This section describes the service process and where the responsibility lies for every process.

2.4.12 Reviews

Service contracts need to be reviewed to verify that they still work satisfactory and whether they work as intended. This review can differ in formality. It can be very informal. For example, the service manager and the customer support manager discuss the agreements over a cup of coffee. But it can also be very formal where the agreements are discussed with multiple department mangers.

2.4.13 Revisions

Revisions to the agreement may be needed. The revisions are driven by several factors, such as: technological improvements, workload, staffing, mergers, etc. When revisions are necessary, a new agreement needs to be determined and approved by both parties.

Revisions also differ from very informal to very formal.

2.4.14 Approvals

It speaks for itself that the service agreement needs to be signed by both parties. The person signing the contract should be the person who is responsible for all aspects defined in the contract.

Defining service contracts is not just a simple matter of describing above described parts.

A research of Thompson and Yost (2003) shows that the definition of service contracts needs careful attention to prevent problems. The next paragraph states the most common problems in service contracting.

2.5 Points of interest when defining service contracts

Defining service contracts is not a sinecure and there are many points of interest when defining them. This paragraph states the most common problems in service contract definition from both a manufacturer (service provider) and a customer (service receiver) point of view. Thompson and Yost (2003) describe several contractual pitfalls in service contract definition. Other authors (Trienekens et al., 2004; Sturm et al., 2000) also acknowledge some of these problems.

2.5.1 Clearly defining scheduled maintenance

The first pitfall is about defining scheduled maintenance. This is a basic part of the

contract, but it is one of the common pitfalls in service contract definition (Trienekens et

al., 2004). The maintenance services are part of the scope section of the service contract

(Sturm et al., 2000) and needs to be defined clearly. Ideally, the scope should include a

list of component parts of the equipment that are part of the scheduled maintenance

obligations. Furthermore, it must describe the general process of scheduled maintenance

(e.g. inspect, repair, train, etc.). Finally, the scope definition should clearly describe

which activities are executed in scheduled maintenance. With a good definition of the

maintenance scope the chance for disputes will be minimized and will benefit both

parties.

2.5.2 Defining extra work

Another possible problem with service contracts is that extra work is not defined properly. It is part of the optional services or exclusions section (Sturm et al., 2000). To avoid this, the service provider must have a strict separation between scheduled and unscheduled maintenance and the extra work. The definition of extra work should be short, simple and separate so that it only applies to optional extra work that is not covered by the normal maintenance. Moreover, the contract should have a list of all items of maintenance that are not included in the more or less fixed pricing of a service contract (if applicable).

2.5.3 Appropriately allocating prolonged start-up risks

Many complex products have start-up risks. That is why the contract should clearly define which obligations the service provider has during the start-up phase of the machine, this is also part of the scope (Sturm et al., 2000). It should clearly state which activities are executed (e.g. training, telephone support, etc.).

2.5.4 Protecting owner interests

For some manufacturers the purchased product is of great importance for their revenues.

Consequently, the machine needs to be up and running as much as possible. That is why the service contract should clearly define the guarantees given to the customer. For instance, what are the penalties for the service provider if he does not meet the agreed guarantees? This should be defined in the non-performance section (Sturm et al., 2000) of the contract.

2.5.5 Clarifying responsibilities

What are the responsibilities of the service provider in case of a system outage? In some cases the responsibilities are clearly stated, but who is going to pay for this activity? To avoid this pitfall, the responsibilities should be defined clearly. Furthermore, it must be defined how the costs of the unscheduled job are covered.

2.5.6 Early service agreement cancellation

Due to whatever developments, self-maintenance may become more profitable than a service agreement. The service contract should state terms about these developments. A common practice is that a fine is paid to the manufacturer when the agreement is cancelled before the end date. This should be defined in the term section of the service contract (Sturm et al., 2000).

2.5.7 Extended end-of-term parts life warranty

Some companies deliver parts that have a lower quality level, compared to the parts that were installed during the service contract, at the end of the contract. In this way, parts need to be replaced sooner, which will have a negative effect on the costs of maintenance for the customer. Consequently, the service contract should state that the quality is always the same and is guaranteed till the end of the contract, but also after the contract with the first off-contract maintenance.

2.5.8 The absurdly long service agreement

Most often the service contract is agreed on for the technological lifecycle of the

machine. However, sometimes, for whatever reason, contracts are absurdly long. For

instance, a full-service agreement of 20 years for a car is not very profitable for the car

dealer if all maintenance costs, etc. are covered by the contract. To prevent this pitfall a

good estimation of the lifecycle is needed and a mutually agreed term should be defined.

2.5.9 Liquidated damages for termination

Many service contracts contain terms about consequences when some agreements are not met. For instance, if a machine breaks down, the manufacturer has to pay for the lost revenues because of the outage. Sturm et al. (2000) also identify this issue in their non-performance section. Consequently the customer needs to assess which costs are caused by a machine outage.

2.5.10 Limitations of liability and exceptions

A common problem within service agreements is the liability of the manufacturer. Who is responsible if a machine explodes and kills 2 people? Although this is a very extreme example, these kinds of issues need to be taken care of in the service contract. The pitfall lies in the fact that the liabilities are not defined clearly enough.

2.5.11 Cost management

Trienekens et al. (2004) point out another common problem in service agreements and that is cost management. Most agreements are based on a fixed price per year. It is often not clear how the costs are differentiated and how they can be related to specific services. Consequently it is very difficult to determine a price-performance optimum for each particular service/ product.

The above-described pitfalls make clear that defining service contracts is no sinecure.

This research does not go into the question of what the best service contract is, but the overview of common pitfalls shows facets of the service contract that can have major consequences if they are not defined clearly. So it identifies important concepts for this research.

2.6 Concluding remarks

The starting point of the literature review existed of the concepts of service support and service contracts in particular. The literature about service support provided a good introduction in the “world” of service. As service contracts are the main subject in this research the focus converged into this subject. The review showed that a good definition of service contracts is important. The literature review also showed that certain criteria in a service contract are more important than others. This provides points of interest for the research.

The scope of services is an important part of the service contract because it defines which services are provided; it is thus an important concept to be addressed during the research. For this concept a derived version (Neopost services) of the Customer Use Cycle (Goffin & Bennekom, 2002) will be used. Another important issue coming from the literature (Thompson & Yost, 2003; Trienekens et al., 2004; Sturm et al., 2000) are the terms & conditions, consisting of: objectives & indicators, limitations, term, exclusions, non-performance and optional services. The above-mentioned concepts can be described as the service elements of a service contract (Karten, 2001).

The management elements on the other hand (Karten, 2001) are also very important in service contracting. The management elements consist of: reporting and reviewing &

changing (cost management, etc) (Thompson & Yost, 2003; Trienekens et al., 2004;

Sturm et al., 2000).

Parties to the agreement and approval (Sturm et al., 2000) are important too, but not an important concept for the research because it does not have a big impact on the services provided and the definitions of those in the service contract.

The concepts from the literature review (Scope of services, terms & conditions and

management of service contracts) and the customer segmentation criteria that were

described in the introduction (Product Market Combinations) form the main building

blocks of the conceptual model. This model is developed to describe the service contract

practices within the Neopost Group; it is thus a guideline for this research. The

conceptual model and the research questions are described in more detail in the

methodology chapter of this report.

Part B

Empirical research -

3 RESEARCH METHODOLOGY

Typifying the research helps with the determination of the methodology (De Leeuw, 2001). In this research only a small amount of objects was studied, a labor-intensive approach was used, the focus was on more depth ness than width ness, there was a selective sample and it concerned mostly qualitative data and methods. Consequently, this research could be defined as a case study research (Verschuren & Doorewaard, 2000).

Case studies exist in two types, single case studies and comparative case studies (Verschuren & Doorewaard, 2000). Because this research identified differences and similarities in service contracts, it was typified as a comparative case study. After the examination of the service contract practices in each OpCo separately they were analysed in total to identify the main differences and similarities. This made it a hierarchic comparative case study (Verschuren & Doorewaard, 2000).

De Leeuw (2001) asserts that the research methodology exists of 5 elements, namely:

the theoretical concepts, the problem statement, the measure and observation methods, the used sources for data and data analysis methods. These five elements are described in more detail in this chapter.

3.1 Theoretical concepts and model

For every research it is important to determine in what way reality is grasped (De Leeuw, 2001). In the conducted research a comparison was made between the different service contract practices using a conceptual model, which was developed using the literature review and conversations (3 discussion meetings) with Neopost service experts (IPSS manager and a product specialist) in the preliminary research. The conceptual model is displayed in figure 3.1. It shows that management of service contracts, terms &

conditions, scope of services and Product Market Combinations influence the content of service contracts.

Product Market Combinations

Scope of services Deliver

• Unpacking

• Installation

• Configuration

• User training

Use

• Supplying parts

• User training

• Courtesy visits

• Maintenance

o Corrective o Preventive

• Functional upgrades

Decommission

• Dispose

• Replace Terms & conditions

• Objectives & indicators

• Limitations

• Term

• Non-performance

• Exclusions

• Optional services

Differences in service contracts

Management of service contracts

• Reviewing & changing

• Reporting

Figure 3.1: Conceptual model

3.2 Problem statement

The problem statement consists of the research objective, research questions and preconditions (De Leeuw, 2001).

3.2.1 Research objectives

As described in the introduction of this report, the management of the IPSS department (NTBV) initiated this research. They initiated this research because they wanted an extensive description (differences and similarities) of the service contract practices within the Neopost Group. Furthermore, they wanted an identification of (“best”) practices that seemingly have a positive influence on the performance of service contracts. Two main reasons formed the basis of the initiation.

So the management of IPSS dare says that insights in the current service contract practices within the Neopost Group can help to create ideas for the development of service (contracts) for forthcoming NTBV products and to create ideas on how to improve the performance of service contracts. Therefore the main objective of this research was:

To provide the management of IPSS with knowledge about current service contract practices for Neopost document systems and to provide knowledge about service contract practices that seemingly have a positive influence on service (contract) performance in virtue of a thorough description and analysis of current service contract practices within the Neopost Group.

This objective is from the IPSS perspective, as IPSS is the initiator of this research.

However, a second objective was stated for the OpCo’s, as they will receive the results too. The second objective for this research was:

To provide the OpCo’s with knowledge about service contract practices of other OpCo’s to induce ideas that might be useful to improve the performance of their own service (contract) practices.

3.2.2 Main research questions

In order to comply with the research objectives, two main research questions were formulated:

The first research question focused on the differences and similarities between the current service contracts within the Neopost Group. Research question 1 was:

What are the differences and similarities between the service contract practices for Neopost document systems within the Neopost Group OpCo’s?

The second research question focused on practices that seemingly contribute to a better performance of service (contract) practices. Research question 2 was:

Which service contract practices for Neopost document systems within the Neopost Group OpCo’s have a positive influence on the performance of service (contracts)?

As already mentioned in the introduction, a service contract practice has a positive

influence on the performance of service (contracts) when it increases the profitability of

service (contracts) and/ or increases customer satisfaction (higher uptime).

3.2.3 Sub research questions

Sub research questions for main research question 1:

•

What is the scope of services of the service contracts?

•

What are the terms & conditions of the service contracts?

•

In what way do the OpCo’s take Product Market Combinations in consideration in their service contracts?

•

What are the service contract management characteristics?

Sub research questions for main research question 2:

•

What is the rating for the different service contract practices?

•

What is the argumentation behind these ratings?

3.2.4 Preconditions

Because of time constraints the 5 biggest OpCo’s, being: Neopost France, Satas, Neopost Inc. USA, Neopost Ltd. UK and Neopost GmbH Germany had priority over the remainder of the OpCo’s. This research had to be completed at April the 14th.

3.3 Sources of data

Several sources were used to gather data. A distinction is made between the preliminary research and the empirical research to describe the different sources that were tapped.

3.3.1 Preliminary research

Before the research could be executed a preliminary research was necessary. The main rationale for carrying out a preliminary research was that there was no ready-made research design on how to identify the differences between service contract practices. So it was not clear yet which concepts needed to be considered in the research.

Consequently it was not possible to draw up specific questions to be treated. To gain insights in service contracting and technical servicing, several sources were tapped.

Verschuren & Doorewaard (2000) identify five different sources for information: persons, media, reality, documents and literature. The preliminary investigation of concepts consisted of four of them: literature, documents, media and persons.

3.3.1.1 Literature

Scientific literature about service support and service contracts in particular was studied.

Studies were found on pitfalls and difficulties in service contracting. Moreover, theories about service support and theories about the content of a service contract were found.

These studies helped in conceptualising the research in more detail.

3.3.1.2 Documents

During the preliminary research the Service Directors

⁵

of all OpCo’s (except Japan and Hasler Inc. USA

⁶

) were contacted by e-mail (see appendix III). All Service Directors (11) were contacted because the selection of the actual research population occurred after a first sifting of the material and after an estimation of time needed for the research. The

5The term Service Director is used to describe the interviewed population. Other names for the function are possible, but to have an unambiguous term “Service Directors” is used. All interviewed managers have a comparable occupation.

6 Japan was not taken in consideration due to language issues. Hasler Inc. USA was not taken in consideration because they sell the Neopost machines through dealers. These dealers are responsible for the provision of services, Hasler Inc. is not.

e-mail was sent on behalf of the manager of the IPSS department to increase the response. After this e-mail the researcher contacted the Service Directors by phone in order to introduce him self and to urge the Service Directors to cooperate in the research. This approach resulted in a vast amount of information about service contracts (documents) in the broadest sense of the word. All contacted Service Directors (11 in total) replied to the request for their cooperation. Although the collected material varied in extensiveness, the response from the Service Directors was a 100%.

3.3.1.3 Media

The Neopost intranet and Neopost Group intranet site provided a great amount of information about the organisational structure and products.

3.3.1.4 Persons

Within NTBV three discussion meetings with two service specialists (IPPS manager and a product specialist) took place to gain more insights in service contract practices.

Information from these discussions helped with the fine-tuning of the conceptual model for the research.

After the preliminary research the final population was selected. The five biggest OpCo’s (Neopost France, Satas France, Neopost Inc. USA, Neopost Ltd. UK and Neopost GmbH Germany) were selected as they had priority over the remaining OpCo’s. Neopost BV The Netherlands was selected as sixth OpCo to be included in the research. The reason for this was that the preliminary information about Neopost BV service contracts showed a distinctive volume-based service contract approach. The remaining OpCo’s were left out because of time constraints.

3.3.2 Empirical research

The goal of the preliminary research was to develop a conceptual model and to formulate research questions. The empirical research was conducted to answer these questions.

Different sources were used to answer the research questions.

3.3.2.1 Documents

The collection of material from the OpCo Service Directors in the preliminary research provided good insights in the service contract practices. It provided information to answer questions about the definition of certain services and terms & conditions in the service contracts.

3.3.2.2 Persons

In order to describe all parts of the conceptual model and to retrieve more in-depth information about service contracts (especially about the management part), semi- structured face-to-face interviews with the Service Directors were conducted. Because of the suspected differences it was not possible to develop a fixed questionnaire for the face-to-face interviews. The conceptual model helped in identifying key aspects that needed to be considered. All Service Directors (6 in total) of the involved OpCo’s (Neopost France, Neopost Ltd. UK, Neopost Inc. USA, Neopost BV The Netherlands, Neopost GmbH Germany and Satas France) participated and were paid a visit in the period from January through February 2006 to be interviewed.

3.4 Measuring and observing methods

De Leeuw (2001) makes a distinction between registering and measuring with stimuli.

Registering means that the researcher observes what happens in reality, thus without

interference of the research or other stimuli. Measuring with a stimulus means that the researcher ads a stimulus and than observes the result.

The study of documents is a registering method that was used in this research. A vast amount of documents was studied: service contracts, intranet content and internal reports.

The measuring method that was used is the semi-structured face-to-face interview (see appendix IV). This method was used because it was not possible to develop a fixed questionnaire with pre-defined answers because of the assumed differences between the OpCo’s. Furthermore, a semi-structured face-to-face interview results in richer information about underlying motives (Malhotra, 2004). As already mentioned, the Service Directors of the Neopost OpCo’s that participated in the research were interviewed face-to-face. During the interviews they also attributed ratings to the different practices. The interviews were recorded on an mp3 device to prevent loss of data.

3.5 Methods for analysis

After the collection of data it needs to be analysed. Basically, this research tried to answer two questions; what are the differences between the service contract practices and what are the “best” practices among them? Because of the typical case study character (Verschuren & Doorewaard, 2000) of this research, the data was mainly qualitative. Thus qualitative analysis methods were effective in this research.

3.5.1 Qualitative analysis

Qualitative data analysis is not as straightforward as quantitative data analysis and there does not exist an accepted single set of conventions for analysis corresponding to those observed with quantitative data (Robson, 2002). Crabtree and miller (1992, in Robson 2002) identify different qualitative data analysis methods; quasi-statistical methods, template approaches, editing approaches and immersion approaches. These methods are described briefly below, ere the selection of the method of analysis in this research is motivated.

Quasi-statistical methods rely on the quantification of qualitative data. With template approaches the researcher attribute codes to the data. Text segments that are empirical evidence of the concepts are identified and given a code of the concept they refer to. The findings are often displayed in a matrix. Editing approaches are pretty much the same as template approaches but they are more flexible. No codes are given to text segments and the researcher interprets the meanings and patterns in the data. Finally, immersion approaches. These approaches are very flexible without systemization and are considered not scientific (Robson, 2002).

In this research the quasi-statistical approach was not possible because the concepts could not be reflected in a quantitative way. This was due to the non-measurability of the separate concepts. The non-scientific character of the immersion approach made it unusable for this research. That leaves the template and the editing approaches. Because the conceptual model in this research was quite comprehensive it could be used to code the collected data in a systematic way. Consequently, there was a template to identify categories, which resulted in the fact that the template approach was suitable for this research. This approach is also more systemized than the editing process. The Miles &

Huberman (1994, in Robson, 2002) approach is such a template approach.

Miles & Huberman (1994, in Robson, 2002) assert that qualitative analysis consists of three activities: data reduction, data display and conclusion drawing/ verification.

3.5.1.1 Data reduction

The conceptual model acted as a template for the collection and analysis of data. During the collection, the data was putted in the category (coding) it belonged to. For instance, when a Service Director asserted something about corrective maintenance this assertion was labelled as a corrective maintenance activity. When the respondents asserted things that were not applicable to the conceptual model, thus out of the research scope, they were left out. This was also the case for other data sources of course. Miles and Huberman (1994, in Robson, 2002) assert that two levels of coding exist: first level and second level coding. The first and second level codes that were used to reduce the qualitative data in this research are displayed in table 3.1 below.

First level codes Second level codes Short description

Unpacking Describes the unpacking policies Installation Describes the installation policies

Configuration Describes the machine configuration policies User training Describes the user training policies

Supplying parts Describes which parts are included in the service contract Courtesy visits Describes whether courtesy visits are performed by service Corrective Describes the corrective maintenance policies

Preventive Describes the preventive maintenance policies

Functional upgrades Describes whether upgrades are included in the contract Dispose Describes the disposing policies

Scope of services

Replace Describes the replacing policies

Objectives & indicators Describes what the objectives and indicators are Limitations Describes the limitations of the service contract Term Describes the term determination of the contract Non-performance Describes the consequences for breach of contract Exclusions Describes which services are excluded from the contract

Terms &

conditions

Optional services Describes the optional services

Reviewing & changing Describes the reviewing and changing practices

Management of

service contracts

Reporting Describes the reporting practices

Product Market

Combinations

Describes how the service contracts take different customer requirements in consideration

3.5.1.2 Data display

Miles & Huberman (1994, in Robson, 2002) identify two main types for displaying data:

matrices and networks. Because it was not possible to determine how and in what magnitude the different concepts relate to each other the data in this research is displayed in a matrix (see appendix V). As mentioned before, the concepts in the conceptual model served as labels to categorise the collected data. It was also used to construct the matrix with the categories on the vertical axis and the OpCo’s on the horizontal axis. This resulted in an overview of the service contract practices within the Neopost OpCo’s and made it possible to compare the qualitative data on specific categories.

3.5.1.3 Conclusion drawing and verification

Miles & Huberman (1994, in Robson, 2002) identify thirteen tactics for generating meaning to the collected data. It is not necessary to state all thirteen. This research focused on the differences between service contracts, so the tactic of “making contrasts and comparisons” (Miles & Huberman, 1994, in Robson, 2002) was mainly used here.

The differences were identified using the comparison matrices (appendix V).

Table 3.1: First and second level coding for qualitative data analysis (Miles & Huberman, 1994)