For a growing number of specialty chemical makers, offering services alongside products is the way to beat the competition. While providing services has long been the practice in some specialty chemical sectors—including automotive coatings, fluid catalytic cracking catalysts, pharmaceutical ingredients and water treatment—more specialties makers are now strategically enhancing this value-added component in response to diminishing growth rates and burgeoning commoditization. "If all you do is focus on the product, then your business is all about price," says Mark Bulriss, CEO of Great Lakes Chemical.

The services approach allows companies to set themselves apart from competitors and potentially increase sales and profits. In fact, in a recent survey of senior chemical industry executives conducted by ACC and Accenture, most respondents said that augmenting products with services is the best way to differentiate their company and propel sales growth. However, only a minority expected it to advance profits.

Another major impetus for providing services is meeting customer needs. "Customers are saying, 'Hey, we don't do this well, do you?' and the supplier sees a new area of business that he can provide, rather than give it to a competitor," says Mike Wheeler, vice president of oil and gas and chemicals practice at Texas-based A.T. Kearney.

In addition, enhancing the services component can help secure more business from the same customer. "Every one of them (specialties companies considering selling services) is looking at what they can do to increase their 'walletshare'—the percentage of business from individual customers—raise market share, and grow revenues," says Wheeler.

And this focus on services is not limited to pure specialties companies, such as Ciba Specialty Chemicals and Great Lakes; it's also apparent in diversified producers with specialties businesses, such as BASF. Even already service-intensive specialties sectors, such as the water treatment market, are seeing further development of services. Among the current offerings from companies are customized product development, on-site technical assistance, training and supply chain management.

For example, when Great Lakes sought to increase its relatively small share of the commercial swimming pool market, it didn't want to "collapse prices" of products, says CEO Bulriss. "We realized we had to put a better mousetrap in place," he adds. To that end, Biolab, the company's water treatment chemicals division, kicked off a telemetry service last year to monitor commercial pools online and around the clock. In addition, the division throws in complimentary services, including training programs and troubleshooting assistance. Biolab's monitoring service "will generate about $10 million-$40 million a year in total sales in the next few years," says Bulriss.

As they step up services, companies are embracing the fact that each customer has unique needs. Veering away from a "one size fits all" approach, companies often customize services and payment plans. For example, Ciba provides custom-tailored formulations to customers such as Coca-Cola. Also, Dow Corning pinpoints particular customers' service needs and often adjusts payment plans to fit the customer. "We can get paid with additional volume purchased, with additional price for that volume, or by billing discreet services," says Jere Marciniak, senior vice president and general manager of specialty chemicals.

Some customers are wary, however, that suppliers may not support services in the long run, says Wheeler. "Customers wonder if added services are a kind of flavor-of-the-moment offering, and whether a supplier will continue to offer such services three, seven, or 10 years from now," he says. Because the jump in supplier services is a recent trend, suppliers have yet to prove their long-term commitment, he notes. Also, now that the industry downcycle is forcing many firms to cut costs and scale back operations, some customers think it's likely that specialty firms will let go of services to reduce costs, he says.

In response, specialty chemical companies insist that they have no intention of abandoning the services model because it's integral to growth plans. For instance, Dow Corning anticipates its services to generate about one-third of total revenue in about five years. In another example, Ciba's service portfolio now provides about 5% of the company's $5.2 billion per year overall revenue, and that figure should double in the next few years as the company expands its portfolio, says CEO Armin Meyer. Ciba intends to introduce five more services to support its recently announced initiative to boost total revenue by 6% a year through 2005, he adds.

But adopting a services model can be difficult for companies that "aren't oriented to being service providers," says Wheeler. In fact, many specialties firms are being dissuaded from fully pursuing the services concept by two issues, he notes.

First, ascertaining the value of services and pricing them can be tricky because "services are more of a conceptual sell than products," says Wheeler. Second, most specialty companies "are not big enough to go whole-hog into services," he notes. Supporting services entails capital investments for equipment, labor and chemicals, and it involves costs that the average specialties firm is not ready to deal with. As a result, large multinational firms with specialty businesses are most adept at providing a wide range of services, says Wheeler.

Still, this services trend will likely gain momentum, as specialty firms continue to grapple with a slow economy, rising feedstock costs and pressure to slash prices in extremely competitive markets. "If we see another dip in the economy, and if we are not yet at the bottom of the trough, more folks may enter the services area," says Wheeler, with the aim of improving revenues, marketshare and walletshare. And in the meantime, those who are on the fence about implementing or expanding the services model will watch those that already have, says Wheeler. "In this industry if somebody gets higher margins for services, then you'll see more and more of those types of services cropping up."

Source: Captivating Customers with Services
Nancy Seewald and Esther D'Amico
Chemical Week, March 19, 2003
http://www.chemweek.com