1. IBM Global Business Services
Strategy & Change
Achieving Profitable Growth:
Services Business Model Innovation
in a Product-Centric Environment

3. Introduction
Confronted by lower product sales prospects, increased margin pressures and
customer demands for free service support, many firms are entering the service
business. Yet most of these firms will be unable to scale their service operations to
develop a viable stand-alone services capability. In the rare cases where they are
successful in establishing a services business it will often fail to deliver the expected
profit margins.
However, when properly planned and executed, a products to services business
transformation generates impressive results. Our experience with several companies
in various different industries over the past nine years shows that new service
businesses:
• Generate 15%-40% in incremental revenue;
• Provide in-depth customer relationships that bring in product “pull-through” sales;
• Generate unique insights into product usage;
• Lower sales costs by 5%-15%, and
• Contribute 10%-25% to the bottom line1.
From Products to Services: Key Challenges
There are many difficulties that beset the general manager who is moving from
leading a product business to leading a product and services business. Being aware
of these challenges and addressing them in the planning phase is critical. Key
challenges include:
Inability to Detach Services Resources from Product Support Roles:
Customers who are used to getting services for free resist paying separately for
them - even when the manufacturer launches an independent services business.
This causes significant internal friction between the product sales team and the
nascent services organization. The product sales team keeps asking for dedicated
services personnel to support product sales, but the services group wants to keep
key talent to help sell and deliver services independently. Often, such conflicts reach
a stage where product and services groups each want their own separate services
personnel who are dedicated to their respective needs.
Misaligned Go-to-Market Model to Sell Services: Many firms task their historically
product-oriented sales teams with selling services alongside products. Since
product sales transactions typically generate much higher revenues than services
transactions, and the primary sales metric is revenue, it is understandable that
services sales receive only limited focus. Yet, expectations are for services to achieve
double-digit growth rates and capture new markets. This fundamental disconnect is
the primary reason why many firms are not able to scale a services business.
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4. Uncompetitive Services Pricing: Manufacturers’ services are often unable to
compete against pure-play service providers who offer similar services - typically
at 15%-20% lower cost1. This causes the services group to stay in a defensive
mode, offering only a product-centric services portfolio with minimal value-add. The
product-turned-services company has now ceded fertile ground to competitors and
has missed out on opportunities to sell those services whereby they could influence
their customers’ down-stream purchasing decisions.
Organizational Paralysis Due to Perceived Channel Conflict: Many
manufacturers’ channel partners offer value-added services. As such when the
manufacturer decides to enter the services business it is quite normal for the
product sales team to anticipate that the newly created services offerings will create
channel conflict and not fully support it.
The Inability to Adopt a Different Business Model (Services- versus Product-
Centric Business Model): Many of the challenges identified above occur in a
corporate environment with a strong product-centric legacy. At its core, services
require a different business model, as illustrated in Table 1. In addition a services
business model requires different selling skills, the ability to develop and articulate
a different Value Proposition (see Table 1), often to a different buying audience, with
different buying triggers and cycles, and with different pricing
The challenge of embracing this new business model is compounded by managers
having to launch this new services business model while protecting and minimizing
any impact to their traditional product revenue stream.
Table 1: Product versus Services Business Model Differences
Product Business Model Services Business Model
Value Proposition • Unique value offered: Speeds, feeds, • Unique value offered: Business acumen, industry or
technology functional experience and specialized skills that enhance
• Quality product backed by the firm’s brand a client’s competitive position
• Target segment: Typically targeted at healthy • Measurable reduction in cost or improvement in key
companies metrics
• Target segment: Companies with “problems”
Operating Model • First make, then sell • First sell, then make
• Manufacturer bears product development risk • Customers share risk
• Sales skills: Technology, product-centric • Sales skills: Establishing long-term client relationships
• Hardware and software sales transactions through collaboration
• Delivery means ship and install • Delivery means months or years of working with client
• Employees: Existing (legacy) employees every day
• Employees: External hires as well as existing employees
Financial Model • Source of value: Innovation and development • Source of value: Talent, customer insight
• Key Metrics: Market-share, COGS • Key metrics: Rates and utilization
• Profit lever: Economies of scale in • Profit lever: Asset reuse, economies of knowledge
Manufacturing
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5. Addressing Products to Services Business Challenges
A general manager can utilize several tactics to overcome some of the key
challenges identified. These include:
Consolidating All Services Under a Single Profit and Loss Statement (P&L):
In one case study, we observed a manufacturer giving away free pre- and post-sale
services... at a cost of 20% of sales1. By simply launching a separate services group
and chartering this services group to manage itself as a free-standing business,
dramatic cost savings were achieved. The newly created services group rigorously
accounted for free services given to the product sales group. Additionally, this new
services group minimized free service give-aways for non-strategic accounts. By
taking these steps, they cut their sales operations cost by as much as 20%1 . This
simple move brought organizational discipline around free services – using them
when and where they were most needed, unlocking services’ potential to pursue
revenue generating opportunities, and bringing greater transparency to sales support
costs. See Figure 1.
Figure 1: Traditional versus Revenue Generating Services Organizational Structure
Corp Corp
Product Product Product Product Product Product Services
A B C A B C
Services Services Services
Traditional Services Structure Services as an Independent P&L
Establishing Consistent Services Pricing Discipline: Since many services
businesses are not historically accountable for true P&L, and are often subordinate
to a product group, they do not have established processes for pricing. We have
observed that even long after services groups have been established, pricing
for various offerings is often inconsistent across any given segment, and is often
dictated by the product sales team. While the product sales team does need to
have pricing flexibility in order continue to win product business in the market-
place, pricing policy and discipline is needed. This prevents a ‘death spiral’ towards
free (value-less) services as negotiations continue to result in deeper and deeper
discounts.
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6. Providing an Independent Sales Force to Grow Services: Selling services
requires a consultative sales approach that is often very different from a product
selling approach that relies more on technology and feature/function discussions.
Typically, transaction sizes of these two different types of sale are also quite different
– with product sales transactions being much larger. This dynamic naturally causes
product sales reps to give away services – a smaller dollar transaction – in order to
earn the larger product business. For this reason we recommend that manufacturers
who are focused on growing their services business should provide their services
group with its own sales force. In our observations it is also best for this new sales
force to be independent of product sales and closely aligned with the services
delivery team.
Gradually Unbundling Services by Targeting Different Customer Segments:
A common objection raised by the product sales teams is that if you unbundle
services for strategic accounts, you will lose competitiveness on future product bids.
To address this concern, services teams need to gradually unbundle services - first
by focusing on new customers and then by offering a new value proposition to
existing customers. In essence, you perfect the new value proposition and pricing
model on new customers. Once a truly value-add service is created, you can then
go back to existing customers and offer them something for which they are truly
willing to pay. This is an important point – service unbundling simply isn’t charging
your existing customers for something that they used to get for free. It is about
refining the value proposition and getting customers to recognize the value in a
service they may not have acknowledged in the past. See Figure 2.
Another important point is that even in industries where a manufacturer has
an existing customer base where it would be easy to cultivate new service
opportunities, we still recommend the path of evolution in Figure 2 since it is better
to establish the new services’ value proposition with non-strategic customers before
coming back to the core strategic customers.
Figure 2: Evolution of Services Target Segment
Near-to-
NEW
Long-Term
Mid -Term
Value
Proposition
CURRENT
Today Transitory
CURRENT NEW
Customer
Suggested New Path
Traditional Path
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7. It is typical of services sales teams to follow product sales teams and build on
existing product relationships at an account. Most services groups in a product-
centric firm generate over 75% of their revenue from the same clients that buy
their products1. There are two common issues that arise with this approach. First,
the product buyer is often not the same as services buyer. Second, the customer
has leverage with the manufacturer during product negotiations. The customer
often asks the manufacturer to lower their services price in order to earn the larger
product business. We recommend that companies develop a services specific
market segmentation model to identify new services opportunities. With this targeted
segmentation, manufacturers can more easily create and offer a unique value
proposition to new groups of customers, (or at the very least, they can offer their
existing value proposition to new groups of customers). This helps manufacturers
avoid the negotiation ‘leverage trap’, minimizes internal conflict between the product
and services sales teams, and causes less disruption to existing business.
Creating a Unique Value Proposition for Channel Partners: Often, channel
partners create a more serviceable product by installing optional third-party
modules. An example of this would be a remote monitoring service (software and
call center support) added to a ‘big-ticket’ medical device. This kind of monitoring
service gives the customer (e.g. hospital or large clinic) knowledge of equipment
issues, needed repairs, or even training or product usage tips. Manufacturers are
best positioned to create this kind of serviceable product because of their deep
product knowledge. Additionally, manufacturers have a cost advantage in this
process since it is usually most cost effective to install such optional modules at
the factory. Lastly certain services, such as remote diagnostics, can be monitored
by the manufacturer and branded under the manufacturer’s name more effectively.
This lowers overall product and service price, gives the manufacturer more flexibility
in capturing additional value from customers in terms of additional post-sales
services. In return, channel partners can market and push customers to sign up for
such services and then deliver those services in the field, sharing value with the
manufacturer.
Another way that manufacturers can create value for the channel is by capturing
product usage information via remote monitoring services. With so many products
able to transmit usage data to manufacturers (internet connected TVs, medical
imaging devices, office equipment, manufacturing systems, etc.), this data gives
manufacturers the ability to create new services based on unique customer usage
insight. Given channel partners’ scope of activity and expertise, it often makes
sense for manufacturers to share this insight and partner with the channel to deliver
innovative new services to customers. For instance, product usage data can lead
to new services that help customers troubleshoot, optimize, customize or train on
a particular product. Due to the breadth of these services manufacturers would
typically need channel partner help to deliver them.
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8. Developing Services Processes which are Distinct From Product Processes:
Key metrics for mature product businesses are revenue, market share, and COGS
while key metrics for service businesses are revenue growth, signings, and utilization.
This fundamental difference in top-level metrics means that different processes
must be emphasized. Manufacturing is an asset intensive business with a focus on
research, manufacturing operations and the supply chain while service delivery is a
knowledge and resource intensive business with an emphasis on customer insight,
knowledge management and resource management.
Executing on the Products to Services Transformation
Once key challenges are addressed with tactics like those mentioned above, there
must be a focus on aligning the organization for execution of the new services
business. Key execution priorities include:
Ensuring Strategic Alignment: Companies need to understand the compelling
business and emotional needs to create a services division – beyond the CEO’s
request. Typically, there is a strong desire for a services business, but it’s not clear
the underlying reason as to why. Is it to help sell more products (a ‘pull-through’
rationale), improve the customer experience, create a stand-alone services business
or improve overall transaction size? Many times it takes a business crisis, or
”burning-platform” for senior management to think through these issues, articulate
the rationale for services, and financially commit to launching the new services
business.
Seeking Efficiencies from Maintenance Operations: One of the biggest
challenges facing senior management tasked with growing a new services business
is where to get funding -especially for the additional head-count needed to sell
services. At a corporate level, there is usually a process for reviewing services
business plans and then providing a level of seed-funding. Yet one overlooked
place for new services venture funding is in the existing services operations. These
existing after-sales services operations often contain inefficient processes that have
not been closely examined during the past decade. By eliminating inefficiencies
and streamlining processes, modest funding can be generated for a new services
venture. To do this, a few common levers should be considered. These include
entitlement minimization, parts inventory reduction, enabling ‘first time fixes’, a
closed loop quality feedback, returns minimization, moving after-sales services out
of the product groups, and forming a global shared service, and global process
standardization.
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9. As an example of how such savings can provide real funding for growth, see Table 2
for hypothetical illustration.
Table 2: Optimizing Maintenance Operation to Fund Value Added Services Growth
Description Value
Revenue $1,000,000,0000
Maintenance Services Revenue $100,000,000
Maintenance Services Cost (%) 40%
Maintenance Services Cost $40,000,000
Typical Improvement Achieved 10%-15%
Cost Saving Achieved $4,000,000-$4,500,000
Revenue Plan for Value Added Service-Year 1 $100,000,000
Quota Per Sales Person $5,000,000
Services FTEs Needed 20
Burdened Labor Rate for Sales FTEs $200,000
Amount Need to Fund Sales FTEs $4,000,000
The hypothetical case above illustrates how optimizing traditional maintenance
services could provide most of the funding needed to support the new Services
sales resources.
Selecting a Services Business Model to Focus On: There are five different types
of services business models: product-centric, professional service, outsourcing,
information-based and financial services2. Each one is a fundamentally different
type of business and with a unique set of sales, delivery, and management skills,
and back-end support required to run them. One of the common mistakes that
service managers make when they launch services is that they try to focus on more
than two services models at a time. We recommend that management carefully
select which services business model they want to adopt and ensure it receives the
required support and attention.
Developing Unique Value Propositions: One reason why value propositions do
not resonate with customers is that many managers – while having deep knowledge
of what customers want - are too product-centric in terms of their customer thinking.
In order to assess the true value proposition of new services, manufacturers must
unlearn their product-oriented view of customers and relearn how products and
services, as a whole, are utilized by various customer segments.
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10. Partnering with Ecosystem Players (Including Competitors) to Offer a Robust
Services Portfolio and Minimize Risk: While many firms have outsourced parts
of their manufacturing or supply chain operations, these same firms are reluctant to
do so for their services operations. Few firms effectively offer their services through
channel partners, yet it is quite possible – and sometimes more profitable - to offer
services under their own (the manufacturer’s) brand, yet sell and deliver the services
through channel partners. Another, often overlooked, area of services growth
opportunity, yet one fraught with conflict, is forming services alliances with other
manufacturers. In essence, this expands the addressable market by offering services
for competitors of the manufacturers’ own product group.
Lessons Learned
Ensure Leadership Commitment: Providing needed attention to nurture and scale
a new services business does not happen unless the CEO commits to providing
key resources and sufficient investment. If a services business is to succeed in a
product-centric environment, it must have more than senior management attention,
it must have their enthusiasm. Building a services business is about inspiring the
key leaders that they are creating the future of the company, even when their day-
to-day assignments in a product-centric environment are overwhelming. In addition
to an inspiring vision, there needs to be a career path for services, and the fledgling
services business must be seeded with proven “stars” in key leadership roles to
demonstrate leadership commitment and attract further talent.
Cultivate Services Culture: To develop a new services business, there needs to be
a culture that promotes service excellence. In many situations the services culture
is distinctly different from the existing product culture, and building blocks need to
be put in place to create a strong services culture. This can be accomplished by
implementing services performance metrics and incentives to sell services, bringing
in outsiders to develop and cultivate services processes, and if required, keeping the
new services group at ‘arms- length’ from the product group to let it mature.
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11. Evolve Organization and Skills: While there is no one right answer for the type of
organizational model that will foster services growth, it is our observation that in order
for services to grow it needs to be managed at arms-length, at least initially, from
the product group. This organization needs the freedom to evolve with the market.
Second, since services require unique skills, management needs to develop a
staffing plan and career path for the services profession. This includes mixing skilled
insiders with recruitment of experienced external hires, as well as articulating career
options for these newly minted service professionals.
Focus on Customer Insight and the Entire Service Value Chain: While most
firms have a well established product development process, services offering
development is far more ad-hoc. Part of the reason for this is the low barrier to
launching a new services offering. This often leads to too many offerings, unprofitable
offerings, lack of sales focus on services, and confusion in the marketplace. In addition,
many offerings are capability-based offerings, which is to say that the services group
offers services because they have the right skills and tools already in place. While this
is not bad by itself, the first test of a viable services offering should be identifying the
sweet spot of customer demand and customers’ willingness to pay, as well as the
services groups’ ‘adjacencies’ in terms of capabilities that might also be marketable.
Pricing, market positioning, sales training and offering ‘retirement’ (as the market
evolves) are all critical steps in service offering development, and require the same
type of discipline as the marketing management process for products3.
Figure 3: Services Value Chain
Services Management System
• Develop strong executive leadership • Organize customer-facing solutions unit • Refocus products unit • Develop services brand
Market Assessment Service Marketing & Sales Service Execution Service Assessment
• Assess demand • Develop scalable service • Assess value of services • Train service delivery teams • Monitor service
• Test competitiveness delivery • Transition customers • Develop infrastructure performance measures
• Identify new opporunities • Assess cost of service • Assess and prioritize • Foster knowledge creation • Assess quality assurance
delivery multiple customer requests and sharing processes
• Develop pricing strategy • Establish long-term value • Benchmark services
relationship against competitors
• Deploy services support • Provide input to market
team assessment
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12. © Copyright IBM Corporation 2009
Conclusions IBM Global Services
When managed properly, new services businesses can deliver solid Route 100
Somers, NY 10589
economic value to the top and bottom line. In order to capture this U.S.A.
value, managers must look at services through a very different lens, Produced in the United States of America
05-09
understanding that this is a fundamentally different business model than All Rights Reserved
their existing product business. We recommend managing the entire IBM, the IBM logo, and ibm.com, are trademarks
Services Value Chain to realize the full benefits of creating independent or registered trademarks of International
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About the Author trademarks in other countries. A current list
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Anees Gopalani, an IBM Global Business Services Associate Partner, “Copyright and trademark information” at ibm.
is the Services and Solutions Leader for the Strategy & Change com/legal/copytrade.shtml. Other company,
product, or service names may be trademarks
practice. He consults to Fortune 500 companies in the electronics and or service marks of others.
general manufacturing industries on growth strategies and business
transformation. Anees can be reached at anees@us.ibm.com
References
1 IBM Analysis; multiple clients, 2001-2009
2 Majewski, Bridgette and Srinivas, Singu, “The Services Challenge: Operationalizng Your Services Strategy”,
IBM Business Consulting Services Executive Brief, 2003.
3 Gopalani, Anees and Bagchi, Sugato, “Products to Services Transition: Challenges and Capabilities in the Services
Value Chain”, www.ibm.com/research, 2001
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