5 ms·

-This is very much my (anecdotal, but from several companies in the subsea business, ranging from huge multinationals to small fry almost mom-and-pop shops) exp

by lb1lf 3y ago

-This is very much my (anecdotal, but from several companies in the subsea business, ranging from huge multinationals to small fry almost mom-and-pop shops) experience, too: Service work is basically seen as a licence to print money. Contract negotiations for newbuilds are cutthroat, the most important parameter being price, price and price. Hence margins are as you'd expect. Except when it comes to service work, as service rates, parts cost &c are hardly ever touched upon in contracts, probably seeing as they will be relevant for the lifetime of the product, which may run for decades. Hence the contract merely states that the supplier must _provide_ service and parts. Which we do. While we laugh all the way to the bank. Of course, if you become too greedy, a customer is likely to start sourcing any parts not uniquely made by you elsewhere and try to have whoever they can find locally install them. Hence some sobriety is useful when determining service rates and parts markup, but the general principle is: You do newbuilds so that you can get a large installed base to reap service income from. Newbuilds are sold at the slimmest of margins, sometimes even at a loss. You'll recoup it when they start using the gear, anyway.

HeyLaughingBoy 3y ago
The "break-even on initial install, make profit on recurring revenue" model is common in a lot of industries. I've worked for engineering service companies where they'll take on a design at minimal profit, in order to secure the manufacturing contract that's worth far more. Or a medical device company that would provide the instrument (normally sold for around $750k) at cost, in exchange for a lucrative supplies & consumables contract that would be needed for over a decade of operation. I honestly think there's more money to be made in services, generally speaking, than in manufacturing.
- OkGoDoIt 3y ago
  Sounds like printers to me. It’s harder and harder to find one where you can replace your own ink.
GordonS 3y ago
I also worked with subsea companies for a long time, and can concur - they'd do anything to get new engineering and manufacturing contracts, then make the margins later on aftermarket service. It wasn't a secret either, people were quite open about it.
- lb1lf 3y ago
  Oh, it is no secret, I believe everyone lives well with this approach - it is a tacit understanding, I think. Customers work hard to bring initial cost down as far as possible, even bringing up in contract negotiations that 'Hell, you'll make this back in service, anyway!' - seeing as when said is said, done is done, the equipment is installed and doing its thing - having downtime is so expensive that no matter what our service rates are, it is money well spent. Anecdotally, I once was in Rio de Janeiro just wrapping up some service work on a vessel in the Guanabara bay (Fine-tuning a number of variable frequency drives had puzzled one of our FSEs no end, so I was called out from engineering to see if I could make it work out). Anyway, a service request came in from a vessel also in the bay; rather than waiting for the home office to wake up and process it, I asked the crew on the ship I was departing from to simply zip me over to the vessel in question; less than fifteen minutes after they had reached out for help, I was on board and started looking into it. They insisted on paying the $5,000-ish fee we usually charge to send someone from Norway to Brazil, despite my being just half a mile away - as they had expected it to be at least two days before someone could arrive; instead, they were back on-hire again in less than two _hours_.
  - GordonS 3y ago
    > I once was in Rio de Janeiro > They insisted on paying the $5,000-ish fee we usually charge to send someone from Norway to Brazil You work for Aker/Kvaerner, by chance? :)
    - lb1lf 3y ago
      > You work for Aker/Kvaerner, by chance? :) Oh, heavens, no! I used to work for Rolls-Royce Marine, but have since jumped ship (or walked the plank!) and now work for a smaller, independent company manufacturing all sorts of offshore handling equipment. I am of the firm opinion that life is too short for working at large corporations. Obviously, YMMV.

by lb1lf 3y ago

HeyLaughingBoy 3y ago

The "break-even on initial install, make profit on recurring revenue" model is common in a lot of industries. I've worked for engineering service companies where they'll take on a design at minimal profit, in order to secure the manufacturing contract that's worth far more. Or a medical device company that would provide the instrument (normally sold for around $750k) at cost, in exchange for a lucrative supplies & consumables contract that would be needed for over a decade of operation. I honestly think there's more money to be made in services, generally speaking, than in manufacturing.

OkGoDoIt 3y ago
Sounds like printers to me. It’s harder and harder to find one where you can replace your own ink.

GordonS 3y ago

I also worked with subsea companies for a long time, and can concur - they'd do anything to get new engineering and manufacturing contracts, then make the margins later on aftermarket service. It wasn't a secret either, people were quite open about it.

lb1lf 3y ago
Oh, it is no secret, I believe everyone lives well with this approach - it is a tacit understanding, I think. Customers work hard to bring initial cost down as far as possible, even bringing up in contract negotiations that 'Hell, you'll make this back in service, anyway!' - seeing as when said is said, done is done, the equipment is installed and doing its thing - having downtime is so expensive that no matter what our service rates are, it is money well spent. Anecdotally, I once was in Rio de Janeiro just wrapping up some service work on a vessel in the Guanabara bay (Fine-tuning a number of variable frequency drives had puzzled one of our FSEs no end, so I was called out from engineering to see if I could make it work out). Anyway, a service request came in from a vessel also in the bay; rather than waiting for the home office to wake up and process it, I asked the crew on the ship I was departing from to simply zip me over to the vessel in question; less than fifteen minutes after they had reached out for help, I was on board and started looking into it. They insisted on paying the $5,000-ish fee we usually charge to send someone from Norway to Brazil, despite my being just half a mile away - as they had expected it to be at least two days before someone could arrive; instead, they were back on-hire again in less than two _hours_.
- GordonS 3y ago
  > I once was in Rio de Janeiro > They insisted on paying the $5,000-ish fee we usually charge to send someone from Norway to Brazil You work for Aker/Kvaerner, by chance? :)
  - lb1lf 3y ago
    > You work for Aker/Kvaerner, by chance? :) Oh, heavens, no! I used to work for Rolls-Royce Marine, but have since jumped ship (or walked the plank!) and now work for a smaller, independent company manufacturing all sorts of offshore handling equipment. I am of the firm opinion that life is too short for working at large corporations. Obviously, YMMV.