When the Products in the marketing portfolio mature, and they are increasingly perceived as a commodity by the markets (despite all redesigns and flashy new features added-on from R&D), as if it were part of a curse, their margins narrow, sinking eventually the contribution to worrying levels. When this arrives, eyes fall on the value-added lines, those typically of after-sales, or maintenance, for instance. The logic follows. We need more of this, more « value-added » services.
After the first steps, sooner than later, we realise it is not so easy. The load that we can put on an average sale for maintenance or any other kind of value-added service has a limit. The immediate phase is then to look beyond the existing portfolio, in a quest to add more value to the client base.
It is then when the sales force starts to get disoriented with the new guidelines, since the new storytelling is not always neither well explained nor well understood by the incumbents. Usually at this stage the need for a new type of leadership arrives, someone who understands the new world where we want to get into. If this happen (which is not always the case) it means the top executive or shareholder has a clear vision of the limitations of the current organisation.
But then the challenge is how to transform the anatomy of the current P&L while keeping what is still, despite all problems, the main source of revenues. To create a new Business Division is usually the answer, which comes not without new complexities of cost and revenue allocation, since the end-customer does not care, of course, about what is from one or the other side, inside the supplier processes.
This is why the first mandate (for any journey or exploration into diversifying and expanding to value-added services, or into any X-as-a-Service model) must be Customer Centricity. A common mistake, for instance, is to bring to the marketing and commercial jargon, what is indeed just part of the internal new processes.
When the first successes of the new Services or XaaS arrive, the company starts realising soon that the current ERP, CRM and Billing systems are not prepared for the new delivery controls needed. Which can eventually make procurement or even client invoicing a burden of manual and clerical work.
The company knows then somehow that new systems are needed, but the detailed functionality associated with any new ERP or IT system is normally still too much unclear to commit relevant new investments on it. Eventually every new sale becomes then a special project internally and the whole organisation starts to question about the beauty of the new strategy which seems to add distortion and noise to the previous peaceful life.
This is a critical point, where cultural transformation needs to be well understood and managed.
To add more « fun », new contractual terms, both legal and financial, arrive as a consequence of financing the new « as-a-service » modes and eventually longer-terms commitments. New partnershipsand alliances bloom, also, and the whole transit can eventually seems a real mess.
Some companies can then withdraw the change, or resign themselves and go back to their product-core. Others understand that the organic transformation is not enough and decide to acquire some new capabilities and skills in the form of M&A, which in turn put also brand new challenges of cultural fit and business-case synergies into the table.
At this stage investments are committed and eventually there is no way back. Some will survive the transformation (as Microsoft or Atlas Copco did, to mention just a couple from very different industries), others will gradually die.
The lesson is clear. The migration into the fields of bringing more value to our customers is at the same time risky and perhaps mandatory, but it needs to be done with a good guide and route-map, and a good anticipation of business, organisational, financial and contractual risks. A good strategy for scaling-up existing capabilities to prepare for change when it arrives. And a clear mindset for the cultural change that needs to be undertaken. The paradise, Ithaca, is there, but not without risks.
Like Ulysses sailing to Ithaca, if you expand into Services, anticipate the risks, get a good skipper, a good crew and a sea chart, and fasten yourself tight to the mast :)