From Glenn Allmendinger of Harbor Research:
The Ubiquity Shift
We at Harbor Research are proud and excited to report we have an article in the October issue of the Harvard Business Review entitled Four Strategies for the Age of Smart Services. Download the entire HBR article from Harbor Research (requires free site registration)
Rather than summarize or abstract the piece, we have included a "short story" below we feel captures the essence of the article and most importantly captures the significance of the opportunity enabled by network intelligence"¦
A year ago, the Chairman of a large Japanese equipment company was reading an annual report from a formidable United States competitor. Flipping the pages, he came upon something that seemed unbelievable. He read it over several times, certain he was misreading it. But it was right there in black and white: The competitor derived over 20 percent of its revenues directly from the sale of services, not from the sale of its equipment or other support.
The Chairman asked himself what percentage of his own company's revenue could be traced directly to the sales of services. Unfortunately, he knew the answer: Zero percent. His company certainly provided services to its customers, but those services were bundled as part of equipment sales. Things had always been done that way. His company had no model for selling services per se. The Chairman called in one of his lieutenants and waved the report in the air.
"How is it that this company has services revenue of more than 20 percent and we have 0?" he demanded. "Explain this to me."
"We don't sell services," answered the lieutenant. "We're an equipment company."
"But we provide services," the Chairman replied, as if he had just caught the Lieutenant stealing.
"Yes, sir, we do," said the Lieutenant. "We have to provide services. If we didn't, no one would buy our equipment."
The Chairman slapped the table. "We must start charging our customers for services."
"We can't do that, sir," said the Lieutenant. "They won't stand for it."
"We must make them stand for it," said the Chairman. Then he paused, not liking the sound of that. "No, not stand for it," he said. "Desire it." This was the crux of the matter, but the crux was a tall order indeed. "I don't want our customers to tolerate us unhappily," the Chairman went on. "I want them to be happy. I want them to give us more money and love us for it. What would make them do that?"
The lieutenant was now feeling slightly faint, but he mustered on bravely. "No one wants to pay for something that was included as part of a package before," he said. "Therefore, the only way that the customer can pay more money and be happy about it is this: The services must be something the customer wasn't getting before, and the services must have such real value that they make the customer more successful and profitable in the end."
"Wonderful!" said the Chairman. "Excellent. I knew you were here for a reason."
He stood up behind his desk and handed the lieutenant the annual report. "I give you one year to develop a plan that will shift our business model to 20 percent of revenue from services. Succeed, and I make you my successor. Fail, and"¦," he stopped, trying to imagine the perfect fate for his underling. "Fail, and you play your electric guitar in the subway."
"I don't even have an electric guitar, sir."
"Your severance package will include one," said the Chairman. And then he waved the lieutenant to the door.
Today, it's conventional wisdom to say that product companies should embrace services as a new means to generate growth and a sustainable position. The logic has been examined many times: Services typically involve a recurring revenue stream, less fixed capital, and potentially much higher margins than those of a strictly product-centric business. Designed and executed properly, services can offer an escape from the downward spiral of commoditization, and create a nearly unbreakable bond with the customer.
Our anecdote about the Japanese Chairman and his lieutenant is true"”or at least that's the way the lieutenant himself presented the story when he told it to a colleague of ours. As we write this, his year of research and strategizing has come to an end. If he did his job properly, he should be reporting several basic things to his Chairman:
The company's new services must be a wholly different animal than the service offerings of the past, and the customer must perceive them as having entirely new value. They must be "smart services" that are fundamentally preemptive rather than reactive or proactive. Preemptive means action based upon hard field intelligence. You launch a "preemptive strike" to head off an undesirable event when you have real world evidence that the event is in the offing. Smart services would thus be based upon actual evidence that a machine is about to fail, or that a customer's supply of consumables is about to be depleted, or that a shipment of materials has been delayed, and so on.
Such smart services create new value by removing unpleasant surprises from the customer's life"”by preventing the customer from being blindsided by happenstance. Further, the field intelligence makes product performance and customer behavior visible as never before, giving the manufacturer unprecedented R&D feedback and insight into the customer's needs, and thus able to provide ever greater ongoing value.
Gathering and analyzing the necessary field intelligence is not a role for human beings. The only way to achieve it is to have the product's own "machine intelligence" continually delivered back to its creator. This requires three things:
Giving products something worthwhile to say and the ability to say it. "Something to say" comes from sensors and microprocessors in the product, most of which are already there. The ability to speak comes from giving the product some form of wired or wireless connectivity.
Putting the product in an "atmosphere" where it can speak and be heard. This requires connecting the product to a global data network. The man in the street calls this network "the Internet."
Listening to what the product has told you. This means collecting and analyzing the device-data to yield actionable business information, and then integrating it across the enterprise. If the Japanese Chairman is wise and just, his lieutenant is not playing electric guitar in the subway today, but is instead gazing out across Tokyo through the windows of his new corner office. Or perhaps the lieutenant has a taste for poetic justice, and is playing an electric guitar while gazing out his new office windows.
Many companies have undergone what we like to call the "ubiquity shift." They've perceived the fact that once intelligent devices become ubiquitous"”as they will"”the commercial context will change, and they've realigned their strategies to capitalize on that new reality. Meanwhile, most product-centric companies remain at least a full step behind in their thinking. They know that their best hopes for growth lie in increasing the services component of their businesses, but they are focusing on the same kinds of services that have always surrounded their products.
What seems to be missing is a good script that communicates the opportunity to senior management in a compelling way. Our research regarding smart services is our contribution to creating that script"”we hope you will take the time to read our piece in the Review.
I don't know about you, but I think Harbor Research has hit the nail squarely.
Walt
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