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Instrument Vendors Say Service Contracts Are Becoming More Valuable in Winning Business

Service revenue has become a crucial component of top-line growth for many capital equipment vendors, and as pharma dollars have been harder to come by over the past year and a half, several firms in the BCW Index have made efforts to expand or upgrade their service offerings.

Molecular biology tool vendors such as PerkinElmer, Waters, GE Healthcare, Agilent, and Molecular Devices, among others, have recently placed a greater emphasis on their service businesses by rolling out new programs, shifting resources to service offerings, or acquiring businesses. The primary goals of these efforts are to diversify their revenue streams while attracting new customers or retaining existing customers.

"It's my firm belief, and you probably have been seeing this within the industry, a lot of customers are moving toward decisions that are based on service rather than product," said Dusty Tenney, vice president and general manager of OneSource Laboratory Services for PerkinElmer.

"They're looking at the level of service, the quality of service, the cost of service — and from that standpoint it's extremely important in the sense that customers look at that as a significant criteria in their decision-making process, and as such, that will become a more significant determining factor in the retention of customers going forward," he told BioCommerce Week.

"They're looking at the level of service, the quality of service, the cost of service — and from that standpoint it's extremely important in the sense that customers look at that as a significant criteria in their decision-making process, and as such, that will become a more significant determining factor in the retention of customers going forward."

According to Tenney, OneSource is one component of PerkinElmer's $250-million per year service business. The firm posted overall revenue of $1.47 billion in 2005.

"Part of making such high-tech products means you really need to have strong service and support for them, otherwise your customers aren't going to be successful," said Judy Masucci, director of marketing for Fisher unit Cellomics. "From that perspective, service and support is vital to promote the success of the product as well as the success of the customer."

Service contracts, like reagents and other consumables, provide a steady revenue stream for capital equipment vendors. From the customer's perspective, "you've got a two, or a three, or a four hundred thousand dollar piece of equipment that you don't want to take the risk of breaking down and having to pay for it," said Masucci. "A lot of the time the service and support contract becomes an insurance policy."

She noted, however, that "the goal of the manufacturers is over time to make products easier to use and more reliable so they don't have a high hands-on need for service."

Targeting Service Contracts Through Alliances and Acquisitions

Two weeks ago, Cellomics announced that it would provide service and maintenance for Beckman Coulter's cell imaging instruments that have been placed with at least a dozen customers (see BioCommerce Week 6/21/2006).

In addition to providing Cellomics with a revenue stream and an opportunity to sell complementary reagents, the deal also may enable Cellomics to eventually supplement or replace Beckman's IC 100 with a Cellomics instrument.

Alliances, such as the one inked by Cellomics with Beckman, is one way for capital equipment vendors to get their foot in the door of a new customer. Another way is through an acquisition — which is what PerkinElmer did earlier this month.

The firm acquired Clinical & Analytical Service Solutions (C&A), which specializes in managing the maintenance of scientific equipment. C&A, which brought in 2005 revenue of $7.5 million, will become part of PerkinElmer's OneSource service offering within its laboratory services business.

The deal brought PerkinElmer about 30 customer accounts it previously did not have, two or three of which "are of significant note — top 10 biopharmaceutical companies," Tenney said.

According to Tenney, the C&A acquisition is "an augmentation of our existing capabilities," rather than providing PerkinElmer with new offerings. He told BioCommerce Week that C&A's focus is on managing relationships with OEMs that provide maintenance for customers, a function that PerkinElmer already performs as part of its OneSource program.

OneSource was established in 1999, and its first customer was pharmaceutical giant SmithKline Beecham in the UK. "This relationship started out to be a multi-vendor type relationship," said Tenney. "The customer had some regulatory issues they were dealing with and wanted to reduce the administrative burden they were dealing with. They came to PerkinElmer and we designed a custom solution." After two or three years, the firm branded it OneSource, he said.

The OneSource program is sold separately from the equipment, said Tenney. "Product is very tangible, while service is very intangible," he said. "In essence, in that selling process it's difficult to get people who are making decisions on tangible aspects to also then acquiesce to discussions around intangible aspects — and when I talk intangible, I mean people. We're selling people capabilities and things of that nature."

The Multi-Vendor Service Model

Another way vendors can win service contracts is by providing on-site resources for customers, promising them quick maintenance on their instruments, and servicing other vendors' equipment — this strategy is part of PerkinElmer's OneSource offering, as well as a program offered by GE Healthcare.

"We have made investments to position ourselves not only to do PerkinElmer equipment, but also to do multi-vendor equipment," Tenney said. "The other piece of it is the management of suppliers," which provide service for equipment that PerkinElmer currently can't service.

The program is similar to a relatively new offering rolled out by GE Healthcare, which also is designed to manage all instruments in a customers' lab — including those not manufactured by GE and sold by competitors (see BioCommerce Week 4/5/2006). As part of its Scientific Asset Services offering, GE Healthcare also places service staff on site at customer labs.

"What we've found is our customers have some significant challenges today in pharma and large biotech in negotiating a multitude of service contracts, and that can be in excess of 100 different vendors, depending on the size of the lab or department," Nick Padula, general manager of services for the life sciences business of GE Healthcare, told BioCommerce Week at the time.

"Just the variation from vendor to vendor had caused a lot of concern for pharma and biotech customers and … a product like this that allows them … to gain control by sourcing this through one large company," he said.

Of course, most of the instrument vendors in the BCW Index do not have the resources of GE Healthcare or PerkinElmer, but they are well aware of how important service is as a component of their offerings.

"We are not in the business of servicing other brands of instrumentation," Brian Murphy, a spokesman for Waters, told BioCommerce Week. However, "the services business is a very important part of our business. It's been growing and has been one of the fastest growing parts of our business over the last five years, and we are constantly looking at ways to expand the services we offer to customers," he said.

According to Murphy, the services business accounts for roughly 27 percent of Waters' annual revenue. Based on 2005 revenue of $1.16 billion, service revenue would have equated to roughly $313 million for the firm last year.

Waters does offer a service called Connections Insight, a remote diagnostics service that comes with the firm's Acquity UPLC, as well as its Acquity SQD and Acquity TQD instruments for UPLC/MS applications. The product feeds information back to Waters to track how well the machine is operating and when the instrument may require preventative maintenance.

"It's an added level of insurance," Murphy said.

— Edward Winnick ([email protected])

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