Firms in the maintenance, repair and operations (MRO) category have benefited from growing demand for their services. Because barriers to entry are low in this category, the number of service providers has expanded due to positive macroeconomic conditions. This has resulted in a highly competitive marketplace.
Steel and aluminum can be key inputs used by suppliers during maintenance and repair. Tariffs on steel and aluminum implemented by the United States government in 2018 have placed upward pressure on operating costs for many vendors in this market. Increasing construction activity and growth in the number of businesses has expanded the pool of customers requiring MRO services. As new office buildings, housing complexes and businesses are erected, MRO service providers are contracted to maintain the facilities of these new buildings. Increasing demand, in addition to moderately specialized services, minimal substitutes and moderate switching costs, has been pressuring service prices upward, establishing a more difficult purchasing process for buyers.
- Switching costs are moderate to high across a majority of the MRO category
- Vendors are typically under contract for their services making switching more expensive
Key Takeaway: Moderate switching costs reduce a buyer’s ability to move from one supplier to another. Vendor’s services are typically vital to the daily operations of many buyers. Because downtime in operations can be costly, buyers are advised to spend a significant amount of time and resources evaluating suppliers through their prior experience and references before signing a contract.
- Specialization is moderate for the average vendor in the MRO category
- Many service providers tailor solutions specifically to the needs of the buyer
Key Takeaway: Moderate specialization increases the difficulty of effectively comparing suppliers within the marketplace. This creates added challenges during the procurement process because many projects have differing levels of technical complexity and scope. Because their technical solutions must be implemented before a proper assessment, buyers should find suppliers with prior experience that matches the requirements of the proposed contract.
- MRO services are necessary to keep business processes running consistently
- Hiring in-house technicians often results in higher overall costs for small to mid-size companies
Key Takeaway: Buyers have difficulty leveraging substitute services because of the importance and specialization of MRO services for daily operations. Thus, buyers should focus on using the large pool of service providers as leverage during the negotiating process.
In the next three years, ProcurementIQ projects that prices for MRO services will continue to rise behind increasing construction activity and growth in corporate profit. MRO services will be in higher demand due to expansion in the pool of potential customers. Price growth will be tempered, somewhat, by growing competition in the market from new entrants. With minimal barriers to entry in this sector, new service providers will attempt to grab market share by undercutting service rates. However, many market conditions, such as specialization, the availability of substitutes and switching costs, are forecast to remain unfavorable to buyers. Furthermore, because these operations are vital for many buyers, only thoroughly vetted suppliers will find significant business. Due to these poor market conditions, buyers are not forecast to gain additional negotiating leverage in the future period. As a result, buyers should look to enter into service contracts sooner rather than later due to the growing rates within the market.