How to Succeed and Make the Shift to Solutions in Today’s Fast Changing Business World

Operating in fast changing global business environments, presents real challenges even for the most successful corporate enterprises and as former market leaders like BlackBerry have learnt to their cost, competitors are always ready and waiting to step-in and take over your market share. What should “Corporates” do to maintain their competitive advantage, and plan for the future? Here Professor Andy Neely, Director of the Cambridge Service Alliance, discusses a concept that is helping to make sense of these many challenges and bear traps – it’s called “the shift to service solutions”. 



Listen to a Podcast with Andy Neely on the topic of this blog

This October like others, the Cambridge Service Alliance held its annual Cambridge Service Week Conference bringing together speakers representing the market leaders in their field, Caterpillar, Finning, IBM, Pearson, and even the Northern Arizona University - which is teaching completely online.  

We wanted to look at what we term “the big shifts” that are going on around the World as organisations look at selling solutions and services rather than products. As firms have sharpened up their business operations to become more competitive they are increasingly looking at selling the outcome that their clients want rather than merely the ownership of the product. 

All these business changes are taking place in a World where climate change, water shortages, demographic changes, and a scarcity of resources are putting huge pressures on decision makers in both the public and private sector.  

One of our Cambridge Service Alliance members with an interest in this shift to services is Caterpillar. Caterpillar machines and products might typically last for thirty years but if you sell a machine tool for one million dollars, it is probably worth about four times that if you include over the course of that products life time, the spares and support services that can be sold around it. The big challenge for Caterpillar in today’s fast changing business environment is not just how do they sell their machines and products, but how do they capture the relationship and then the support that they can then offer on the back of the sale of that product to make sure their customers get what they  want, which is the ability to move earth, or extract coal from the earth. The customer doesn’t necessarily want the machine itself, it wants the outcome the machine delivers!

Cameron Ferguson, Caterpillar

Cameron Ferguson, Manager of Global Dealer Capability in the Customer Services Support Division, Caterpillar, told me:  “Our customers make lots of choices about where they are going to get their services done, by themselves, by Caterpillar or by another party so we want to make sure that Caterpillar is at least being considered to being the preferred and primary service supplier. We can do that through solutions rather than just the traditional linear service, but a solution that says, “We can guarantee up time, we can guarantee costs per hour we can guarantee parts availability”, whatever it maybe that is tailored to that particular customers’ needs.”  

Surprisingly as the Caterpillar example shows, what we call “the vision” planning is relatively easy. You can understand the role that technology or data might play in enabling you to remotely monitor your equipment or in the education world to remotely monitor whether students are completing their course assignments and are therefore likely to graduate from the programmes they are taking.  However the planning process gets tougher when you want to put the right technological structure in place. You will need to get the right behaviour in your organisation and you will need to get your customers to accept these solutions and services! As you can imagine, that will involve a significant change process in any organisation – what we term “the shift to solutions”.

We have learnt that rarely does a single organisation have all of the capability to deliver the service solution or the outcome. Increasingly this shift requires networks of organisations to come together, to pool their resources and capabilities to create solutions for their customers.  So who are the players in these new networks and how do they emerge?

Increasingly, we are finding that these new networks involve firms who are traditionally competitors, who come together for the purpose of providing a better service for their customers. We find this work fascinating and revealing. There are some really interesting dynamics around the way firms collaborate, when they compete and how the ecosystems they are working in take shape.

Hold onto your seats, working towards these service solutions requires your business to be quick off the mark and ready for a white knuckle ride. It is clear that as your customers’ business model changes, and what they do changes, you will also need to evolve your business, but here comes the scary part, as you evolve your business, that in turn will allow further evolution in the customer’s business model too, which in turn demands further evolution in your own business plans! Responding to the challenges of business today will require a continuous process of evolving your capability.

We know that firms have thought about competition between firm A and firm B, but now people are worrying about competition between the ecosystems they have traditionally worked in together, and the roles each play in that system. You will need to think very carefully about where you want competition, and who you want to collaborate with! Maybe you should ask yourself if you want to encourage competition between some of your suppliers, and if perhaps you use multiple suppliers for different technologies or sub- assemblies, or data, which ones you might want to encourage competition in, and which part of the ecosystem that would impact on. At the same time you may want to plan for change simultaneously in another part of the ecosystem as well. This means that your boardroom strategic discussion is much more about the way the ecosystem works and your role within it, rather than the traditional model of: “we want to compete with firm A or firm B”.    

Certainly a business model that can react with speed and the ability to evolve your business model over time is very important for some industries. You will need to think about the clock speed of the industry you are in, so in some industries the pace of change will be incredibly fast while in some industries it will still be more measured, so therefore you can afford to be slightly slower in evolving the business model.

One of the things we have learnt in the Cambridge Service Alliance is that there are ten basic lessons that you need to get right if you are going to make a successful shift to solutions management. Let me give you three of these.; You will need to understand risk and the transfer of risk and if you offer solutions to your customers find out what risks you are being asked to take on and how that plays out over the longer term? The context really matters too, so you have to ask yourself – “Are we ready to make this transformation as an organisation, can we break away if we are a product or technology business from our technology heritage and worry more about service?” In terms of context, you are really asking- “Is the customer ready for our service?”

The third question to think about is: how do we design the customer service experience to create the right emotional response as well as delivering the pure technical service. Our Alliance partner, Finning have thought carefully about what their customers’ want and if they can support their customers. Finning know that their customers want equipment that works, they want no down time so they  have put processes and products in place that meet those needs,  but they have also built a centre that creates a great customer experience too. Customers walk in and have been known to say: ““Wow” are you really monitoring three-thousand pieces of equipment remotely, are you really watching what is happening, and looking after our equipment, you are like a safety blanket for us?” This is a valuable service so that emotional response from the customer is partly created from the design of the control centre in Finning’s case as well as the products and services it is selling.  

Lucy Courturier, Finning

Lucy Couturier, Finsight Manager,  Finning,  told me: “We have really become involved with the concept of Ecosystems since working with the Cambridge Service Alliance and we now ask ourselves: “who are all the players”? We take into account everybody that has an impact or that we impact in our day to day operations. We have customers, competitors, suppliers, and we need to understand how each of those interact to be able to provide the solutions that customers want. We can’t just look at one part of that puzzle, we need to understand that complex web of relationships to manage it effectively. The customer experience is as important to us now as the business side is. The customer experience and the relationships they have with us, is as critical in moving us forward.”

Mark Anderson, President, Schools & Higher Education Strategy & Business Development, Pearson, says the growth in those needing higher education in the World and the technology changes that are taking place, means the sector will need to adapt to change on both fronts on a huge scale in the future. He told me:  

Mark Anderson, Pearson

“There is an enormous growth in demand for higher education, at the moment there are about 180 million people in tertiary education, and in about thirty to forty years’ time that will rise to about  500 million people. Countries like China, Brazil, India and South Africa will expand their education systems and at the same time the development of technologies is pluralising access to and availability of education, so we will we have to bring these two changes together.  

“The ecosystem concept is one we have worked closely with through the Cambridge Service Alliance, we probably didn’t use it previously but if you are a company like Pearson where for hundreds of years you have essentially been selling books, you had a relatively simple ecosystem consisting of book producer, distributor or intermediary, book seller, and student, there was a linear progression. Now there is a far more complex diverse international mix of organisations who have a stake in education. Governments are now more activist in education too, so we need to track a world which is more complicated with a lot of new entrants who are having a rapid and an immediate impact. Our business environment is changing very quickly and an ecosystem model is a very good way of tracking that.”  

As these stories from Finning’s and Pearson show the experiences of others are really an important part of the business journey. Ecosystems are a really good way of thinking how you might innovate your business, how you might come up with services and solutions but remember just because you have come up with them, doesn’t mean to say that you can implement them. There is a lot of hard work to do to bring those visions, those ideas, those innovations, to reality.

I hope we can help our partners come up with the innovations and then help them execute them too, this is what we mean by the shift to service solutions. Hold tight, it could be a roller coaster ride, but we guarantee it will be full of excitement.

[More on this event]

Struggling to Make the Shift to Solutions: Write Your Own Obituary

It is clear that organisations across the globe are making the shift to solutions. Often the ultimate aspiration is providing the outcomes the customers (and in some some cases the customer's customers) want and need. Often this journey is described in terms of a service ladder - gradually moving from providing products to supporting the products with spares; through to remote or condition based monitoring; and finally onto contracting for capability or outcomes. While a logical flow and an inherently attractive proposition, successfully making this shift to solutions in reality is challenging. A critical issue is winning the hearts and minds of people who are used to a world of products. If you've always worked in a product or technology centred business then a commonly heard fear is "won't services cannibalise the product business" or put more directly "aren't we sowing the seeds of our own destruction - we'll kill the product business if we are too good at offering solutions".

Hearts and minds are always difficult to win, but one useful trick is to play on this fear. Recently we have been experimenting with asking organisation's to write their own obituary. The exam question we set is "write or record a short obituary for our services business. Imagine we are five years down the road and we haven't made our services business work (while all of our competitors have). What would the press be saying about us? What would they put our failure down to? Who would get the inheritance (e.g. which competitor gets our business and why)".

A simple trick, but the responses that are generated are both illuminating and in some cases humbling. Senior executives start to verbalise ideas like "ACME Inc has divested all of its remote and condition monitoring efforts and sold them to Monitoring-R-Us, a private company specialising in industrial solutions". Five themes consistently shine through these obituaries - the failure of the organisation concerned to keep pace with change; the inability to break away from the product-dominant culture; the need to get closer to customers and really understand their businesses; the reluctance to make the necessary investment - dabbling rather than committing to services and solutions; and missing the opportunity that the era of big data and sensors offers. In another blog I'll try to write more about these issues, but in the short-term if they strike a chord with you, join us in Cambridge on 1st October for the Cambridge Service Alliance conference - "Successfully Making the Shift to Solutions" - where we'll hear from organisations that are making the shift and overcoming the barriers. 

Trading off service experience and service efficiency

I have just been at the QUIS2013 conference in Karlstad, Sweden. The final session was a panel discussion with the title "Small Details: What They Are and Why They Matter". The panels, which included a mix of academics and managers, started by providing a few examples of small details and why they matter is services. Janet McColl Kennedy, a Professor from the University of Queensland, told a story about an elderly person in  a care home, who when asked "what could we do to make your life better", replied "let me have a real cup of coffee in the morning". The chair of the panel (Professor Ruth Bolton from Arizona State University) countered, by saying "I'm Canadian, so for me it would have to be tea". This short exchange illustrated the importance of small details. To get the service right you have to deliver services which are personalised, contextualised and time dependent. Manfred Dasselaar, a service manager at Ericsson, built of this theme, describing the challenge of getting customers to understand how hard Finnish engineers were working on solving their queries when the customers and engineers were not co-located. He gave the example of a conference call involving Finnish engineers and their external customers. The customers were getting frustrated that they were not getting much from the engineers (they weren't communicating much, but then they were Finnish). Because the customers were not in the room they could not see that although they were not talking much, the Finnish engineers were sharing images and data on their computer screens - screens that the customers could not see. Once the customers understood how the engineers were communicating and how hard they were working on solving the problems, they became much happier. Again an illustration of how small details can influence the service experience.

So who delivers these small details and how do they make sure they are time, person and context dependent? Often the staff at the front line - often the least trained and least well paid people in the organisation, but those closest to the customers. Should we give these staff more autonomy? Should we train them and seek to create an organisational culture which allows service providers to personalise the service experience? At first blush the obvious answer is yes - this might provide a new and sustainable way of competing. But there are three issues with this first blush response. First, by personalising the service we can increase the cost and complexity of the service - we lose the efficiency gains that can be driven by standardisation and commoditisation. Second, by personalising the service we can create inconsistencies in customer experiences. If every time you are served by a different server and you get a slightly different personalised version of the service then how frustrated do you become when one server fails to do that special thing for you that the previous server did. Third, the more we use technology in services, the more we end up standardising the service. This drives efficiency, but does it deliver the best customer experience? Are automated voice systems better than talking to real people?

It seems to me there's a careful service design and delivery tradeoff to be understood here. Clearly personalising services and tailoring them to individuals in time and context can enhance the service experience, but at what cost in terms of efficiency and consistency? In designing and delivery services we need to be clear about the boundaries - where the scope for personalisation lies and where we should standardise and control. Going too far in either direction is going to result in disaster.

Professor Andy Neely is Director of Cambridge Service Alliance at the University of Cambridge, and a world authority on performance management and complex services.

www.cambridgeservicealliance.org

Cisco 14% rise in profits from services sales

Cisco recently published details of its 14% rise in profits from services sales.  We see this as part of the general trend for companies to move from selling products to providing services. Companies such as Dell and Xerox have diversified into services, following in the footsteps of IBM which has successfully grown its consulting and IT services business while pulling out of the PC market.

Service companies now account for 75% of the economic activity in developed economies and the number of firms providing services is growing rapidly. The reason? Companies are less interested in owning the product. They want the outcome from using it and that translates to a product, backed by services.  Our work with firms as diverse as BAE Systems and IBM shows that companies face common challenges as they take on new responsibilities:- defining what customers value, delivering it and managing the information and risks.

Professor Andy Neely is Director of Cambridge Service Alliance at the University of Cambridge, and a world authority on performance management and complex services.

Why service innovation is different, and why that matters

Service companies comprise 75 percent of economic activity in developed countries.  But companies are often seen as less innovative with service provision than with product design, manufacture and sales. But is this really the case or we are just misunderstanding the process of innovation in services?  We recently did some research to find out.

The focus was put on four providers of complex relational services, such as performance-based contracts that guarantee product availability. The research has shown that the conception of the product orientated innovation process  (company innovates- company sells – customer uses) doesn’t hold in the relational services, where the customer’s involvement in co-creating the service is accentuated. That means that the new services development is simultaneous to their production and use, thus making the customer a co-creator of the service. Firms that prepare properly for these two characteristics – simultaneity and co-creation – before engaging in relational service provision are likely to be more successful.

The service contract is designed, contracted for and then delivered by the service provider on the basis of the outcome that the customer wants. The service is innovative when the service provider offers a new outcome- an outcome he never provided before. The innovation actually takes place through interaction of the service provider and the client, making them co-creators of the service through the delivery.

Risk and reward in service innovation have a different nature as well. Although the service provider may invest in the infrastructure necessary to provide the new service, through payment of service fees the client effectively co-finances the innovation process.  As customer signs a long-term contract, the service provider avoids the market risk. But the service provider must address the risks inherent in delivering a novel service, whether these are higher service costs, contract penalties, loss of profits, or a dented reputation.

Problems with initial service delivery might cause the company to withdraw from the innovation. This actually disables it to understand the lessons from the initial innovation and reap the benefits that accrue over time through additional services to existing and new clients. The potential benefits for the service provider include: first-mover advantage, enabling the firm to leverage its learning by using it to secure further contracts with existing or new clients; cross leveraging innovation infrastructure investments and learning across other service contracts; and using the initial service innovation as a catalyst for other types of innovation –both services and products.

Firms that wish to be good service innovators need to have cross-functional teams and company-wide incentives to innovate, in other words an organizational-wide entrepreneurial culture should be encouraged throughout the company. This stresses how crucial adopting a long-term approach to innovative services is. The client and the service provider have to have a long-lasting, mutually trusting relationship in order to capture the full benefits of the innovation. They have to be well acquainted with one another in order to overcome the initial problems.

Ivanka Visnjic,
Research Lead, Cambridge Service Alliance

The research reported in this blog can be found in this report 'When Innovation Follows Promise - Why service innovation is different, and why that matters' Executive Briefing, Ivanka Visnjic, Taija Turunen, Andy Neely

Social media and the new way of networking

Online profiles on social networking platforms such as LinkedIn and Facebook have powerfully altered the way we network and build relationships with colleagues and work partners.  Paradoxically, the intensification of competitive pressures in business resulting from the information age is accompanied by an opposite phenomenon, of distributing help more willingly to connect people to a wider group than ever before.

It is not new that people from the same circles help each other out, be it to find a job or share access to new opportunities.  Now, as social circles expand to their widest through social networks, the definition of “friends” is also influencing who we are willing to help, in the expectation of a returned favour later on in life.  Every new encounter is perceived as a potential resource for a future time, and comes with positive expectations.  

People who belong to the same network are most likely to be competing for the same job or the same promotion at some stage in life or another.  Yet the members of a common online social network are inclined to think of themselves as “friends” or connections that they want to help out.  In the academic jargon of social networks, online contacts serve as “brokers”, people who may introduce or refer one another to a contact or for a position.  Sometimes, this happens between people who may never have met each other in person.  A few connections in common or a few keywords may be enough.

Online profiles expose our social networks to everyone.  The effect is partly to show how well-connected we are, a well-recognised measure of “strength” or social capital in the business world (Kilduff et al., 2011, Inkpen & Tsang, 2005).  But the collateral is that sharing our network to friends and colleagues, opens up the same resource to them.  Is the power of social media to have instituted a silent etiquette, of never to refuse an introduction?

Meantime, in the physical world, shrinking developed economies mean increasing competition for every single job position.  In investment banks, 2000 applications get narrowed down to 30 new hires.  In less structured professional environments such as entrepreneurship and business, fewer and fewer new technologies or new ideas ever turn into profit.  Competition wipes out small and large companies every day, products become obsolete ever faster, and entire industries disappear overnight.  So, is online social “brokerage” leading to a more efficient matching of human resources and work, or is it enabling the identification and selection of the very best and very few for the over-subscribed opportunities?

Claire Weiller

Cambridge Service Alliance

Beyond Servitization: What's Next?

I received an e-mail out of the blue from the leader of a company in Taiwan who asked the very thought provoking question "what is your prediction for the next revolutionary business model after the servitization of manufacturing". Rather than reply privately I thought I'd offer some public thoughts.

The first to say is that I don't think "servitization" is a business model - instead I see servitization as a transformation journey. Servitization is concerned with building the organisational capabilities and processes required to design, deliver and innovate high-performance product-service solutions. A business model is slightly different - it defines how you create and capture value through appropriate value propositions and delivery systems that operate within a broader ecosystem. A good business model also considers the risk or accountability spread that your organisation is exposed to through this combination of value proposition, value delivery system and ecosystem evolution.

Having said this, I understand the point behind the question, namely what business model options do manufacturing firms face post servitization? I'd break my answer to this question into two parts. First, I would think about the elements of the business model and ask what scope is there for change in terms of: (i) the value proposition; (ii) the value delivery system; (iii) accountability spread; and (iv) the ecosystem. Second, I'd think about whether there may be radically different business models at the aggregate level. The answer to the second question is relatively short, so I'll start with this one and simply say "I think its unlikely that we'll see radically different generic business models". Indeed one could argue that today's seemingly different business models are a rehash of old models. Take, for example, business that make money by attracting eyeballs and selling advertising - Google, Facebook, etc. Well TVs and newspapers have been doing that for years. The medium is different, but the base business model is the same.

So let me move to the more detailed level. Here I think we will see innovation - particularly in terms of the value delivery system; the accountability spread and the ecosystem. When it comes to value propositions I think most people understand the shift to outcomes - that organisations have to think clearly about what outcomes their customers really want and how they can then deliver these outcomes, rather than products or services. Where there's scope for innovation is in the value delivery system. Increasingly technology is playing a role in allowing organisations to innovate the way they configure the resources they use to deliver their products and services. Remote asset monitoring and diagnosis - using sensors and satellite infrastructure to monitor assets in the field and then diagnose potential maintenance requirements is becoming more widespread. In the education world, remotely monitoring student progress through online courses and intervening only when students seem to be going off track, allows schools and universities to focus teacher and faculty time on those students who most need support. Remote health monitoring technologies are revolutionising medicine and healthcare. Wearable devices can monitor the vital signs of individual patients letting doctors and hospitals intervene only when necessary. In essence the first wave of business model innovation we are seeing concerns  innovations in the value delivery system - looking for new ways of combining and configuring resources to ensure value is delivered to customers as efficiently as possible.

The second theme we'll see is a greater understanding of the risk and associated accountability spread. As organisations innovate their business models and take responsibility for outcomes they also take on risk. As they innovate their value delivery systems, often partnering with others, they reduce their own level of control. Both of these activities increase the risk or exposure of the contracting organisation. Too often today organisations cope with this increased risk and exposure by increasing their prices (and hence safety margins). Technology will help organisations get a better handle on the risks they really face and how these risks can be mitigated and as a consequence we'll get more sophisticated about how we price risk.

The third and final theme we'll see is greater innovation at the level of the ecosystem. Competition won't solely focus on your direct competitors. Instead firms will explore what role they should play in the broader ecosystem and how they can shape the ecosystem. Apple is one of my favourite examples here. By opening up the technology required to develop apps, Apple has encouraged a community of apps developers. If you have a large community of apps developers then you get lots of cheap apps - the individual apps end up competing on price as there's always a similar app to yours on offer. So the hardware - the iPad, iPod and Mac - becomes more valuable because it is the route to access lots of cheap Apps. When it comes to business model innovation we'll see more and more firms thinking this way - how do we shape the ecosystem to help us better create and capture value.

So back to the original question - "what is your prediction for the next revolutionary business model after the servitization of manufacturing". The short answer is that I don't believe we'll see radically new business models, but I do think we'll see radical innovations in the elements that make up business models - particularly in terms of the the value delivery systems, the accountability spread and the broader ecosystem.