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.

The Installed Base: How Well Do You Understand the Opportunity?

In a previous blog I talked about the reasons why firms servitize. One important reason is the installed base - the ratio of new product sales to installed equipment. In mature industries these ratios can be significant. Figures often quoted include an installed base of 13:1 for cars, 15:1 for civilian aircraft and 22:1 for trains. That is for every new train sold, 22 are already in operation and available for service and support. Consider that trains have a working life of between twenty and thirty years and you can see why the installed base offers a significant business opportunity. Indeed in many sectors, the rule of thumb used is that a product will consume 3-4 times its original purchase value through its operating life in terms of spares and consumables.  So a $1 million dollar piece of construction equipment will consume between $3-4 million in consumables and spares over its thirty year operating life.

Researchers at the Cambridge Service Alliance have recently been looking at the installed based, seeing what data we can gather to understand the size of the installed base in different sectors. Our preliminary analysis suggests that the traditionally quoted figures underplay the size of the installed base in some sectors, especially aerospace. Take, for example, US aerospace - in 1995 there were 212,000 US aircraft in operation (both military and civil). In the same year 2,441 new aircraft were shipped, giving an installed base ratio of 87:1. By 2005 there were 246,000 US aircraft in operation, with 5,426 new aircraft shipped, giving an installed base ratio of 53:1.

While both figures (87:1 and 53:1) are considerably higher than the figure traditional quoted (15:1), the reduction in the ratio is interesting. One might expect that the installed base ratio would increase over time. New products are sold at a rate that is faster than old products are retired, but in the case of aerospace, underlying market growth has a significant impact. The number of new civil aircraft sold per year, for example, effectively doubled between 1995 and 2005, and it is this market growth (in civil aircraft) that brings down the installed base ratio. Even so, an installed base ratio of 53:1 highlights the significant opportunity that exists.

The story in the automotive sector is rather different. Here we see slight growth in the installed base ratio between 2003-2008, from 13.5:1 in 2003 up to 14.7:1 in 2008. This growth is driven by an increase in the installed base of passenger vehicles, with 13 million new vehicles being registered in Europe in 2008 and 198 million in operation. A key issue in the passenger vehicle market is the rate of retirement of existing products. Given the relative maturity of this sector, new cars are often replacements for existing cars and so as new sales are secured, old cars are retired. For this reason it is unlikely that we'll see significant growth in the automotive sector in the installed base unless product life cycles increase and/or consumers decide to reduce the rate at which they replace their cars.

So this brief analysis suggests three issues to consider; (i) understanding the size and potential of the installed base matters; (ii) in some sectors the installed base ratio will not change significantly, as the market matures and product replacement becomes the predominant reason for new product sales; and (iii) significant market growth can reduce the installed base ratio, although even so the installed base can be an attractive market segment.

Successfully Implementing a Service Business Model in a Manufacturing Firm

The expected economic benefits of ‘servitization’, a popular trend among durable goods’ manufacturers designed to expand the scope of their offerings from products into through-life-cycle services, have been disputed in light of recent empirical evidence suggesting that hurdles associated with the implementation of services may even result in performance decline.

In a recent study we undertook extensive research into ten sales-and-service subsidiaries of a successfully servitized manufacturing multinational to shed light on this ‘service paradox’.  The results showed that success in setting up a service business in a manufacturing firm results from the presence of three operational capabilities that facilitate service performance. 

1. a skill set capable of extending the relationship with the broad client base;
2. the capability to develop sophisticated service offerings that provide better coverage of customers’ needs; and
3. the ability to offer all the services efficiently.

Maintaining the breadth of service presence while deepening customer relationships can be a challenging balancing act, since capabilities that contribute to ‘service presence’ may conflict with the deployment of ‘service development’ and ‘service process’ capabilities. This research is outlined in a recent paper which offers to academics and practitioners of servitization a guiding framework within which to develop a comprehensive set of service capabilities, and highlights the nature of their relationships.

Ivanka Visnjic

Cambridge Service Alliance