From Product Vendor to Service Provider Successful Servitization

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1 From Product Vendor to Service Provider Successful Servitization

2 From Product Vendor to Service Provider Successful Business Transformation to the Cloud Companies in virtually every industry can deliver unprecedented value to their customers through new technologies powered by the emergence of the cloud. Organizations that embrace these new technologies can transform themselves from product vendors to service providers that deeply understand their customer s needs and produce products and services that will delight their customers. Managed correctly, this transformation will increase customer loyalty, provide new, predictable revenue streams, and give the company significant competitive advantage. [The cloud is] a sea of change a deep and permanent shift in how computing power is generated and consumed. It s as inevitable and irreversible as the shift from steam to electric power in manufacturing just as that transition brought many benefits and opened up new possibilities to factory owners, so too will the cloud confer advantages to those who adapt. Andrew McAfee, Harvard Business Review At the same time, increased interconnectedness, mobile technologies, and the proliferation of social networks have fundamentally changed the way individuals and organizations gather information, make decisions, and execute purchases. The rapid evolution of technology, combined with societal changes and the recent economic turbulence, represent a new normal faced by organizations worldwide. To succeed under these new normal conditions organizations need to be more flexible, better able to respond quickly to changing conditions and properly positioned to provide superior value to their customers. The cloud gives companies in a wide variety of industries the platform they need to succeed in today s world. The most obvious application of cloud technology is software delivery. Companies such as Salesforce, Adobe, and Oracle now offer subscription-based Software-as-a-Service (SaaS). However, innovative companies in other industries are utilizing the same technologies to deliver products as a service. Diverse products including video conferencing, jet engines, and automobiles are now available on a pay-as-you-go basis. The increased flexibility and competitiveness that cloud-powered technologies offer to vendors and customers alike has been compared to the changes experienced by manufacturers when electricity replaced steam power in factories. 1

3 As with any disruptive technology, there are tremendous opportunities and challenges for companies that embrace these new methods, and significant risks for those who do not. Are you and your organization truly ready? Successfully transforming your company from product vendor to service provider involves much more than technology. It requires that every function in your company be aligned and prepared. Next Step s team of experienced and knowledgeable consultants has helped large and small companies in a variety of industries to navigate this transformation. In our experience, there are a number of questions which must be asked and answered by the company s executive team to maximize the success of the transformation. Ideally these will be taken into account before embarking on the journey from product to service. How will transformation impact short-term revenue? In the long term, providing a subscription-based service will lead to higher and more predictable revenue; in the short term, there will be disruption and significantly negative impact to the current revenue stream. How will you mitigate the impact of the transformation? What are the business processes necessary for a service model? Deploying and managing subscriptions and renewals requires different business processes than selling a product. Your entire team, including sales, channel partners, accounting, operations, and support all need to be ready to provide customers a positive experience. in a service-dominant world, value is co-created by companies and customers working together. Dave Gray Do our field sales and channels have what they need to succeed? The process and methodology needed to successfully sell services is fundamentally different than that for selling products. Irrespective of whether you sell through a direct sales force, channel partners, via the Internet, or some combination of these, your sellers will require new tools and methodologies to effectively sell your service. How do we adapt incentive programs to promote the service offering? The commission structure for a service has to be very different from one designed for product sales. (See sidebar How Changing Business Models Affects Incentives. ) Creating a program that aligns incentives with employee expectations and corporate goals may be daunting, but it is absolutely critical to a successful transformation. 2

4 How can we enhance our service offerings? Providing a service keeps you in closer and more constant communication with your customers. This gives you the opportunity to gain a deep insight into your customer s challenges and the benefits they derive from your product. This insight can help you add capabilities that will increase adoption, consumption and customer experience. How will we measure success? Revenue is one obvious answer, but there are several other metrics that can provide significant insight. Cloud connectivity gives you the opportunity to both measure engagement and quickly test new features and functionality. Many companies conduct A/B split testing for new features, and using the immediate and real feedback that they receive, quickly release the best option. How Changing Business Models Affects Incentives If you sell a product for $50,000 and pay 10% commission, each sale would result in a $5,000 commission payment for the rep. If you switch to a pay-as-you-go model, and sold a monthly subscription for $1,667, total revenue over a three year period would be $60,000. Product Service Sale price for a purchase $50,000 Monthly Subscription $1,667 10% $5,000 Commission???? Clearly 10% of $1,667 won t provide the same level of incentive as the reps are used to receiving. Restructuring your compensation to provide incentives that are in alignment with corporate goals can be a complex problem. What will delight your customers? Being connected to your customers through the cloud provides the opportunity to track a wide variety of metrics. What is the most critical data to track? Do you have the systems in place to gather and analyze the metrics in a timely and accurate manner? How can you use this information to delight your customers and give you a sustainable competitive advantage? What features and functions should be included in your as-a-service offering? There are be many ways to differentiate between service levels and/or traditional versus subscription offerings. Should you offer multiple subscription types? How do you price a monthly or annual subscription for each? How are each of the subscriptions differentiated? How and when will existing customers be migrated to the new model? Customers who recently purchased your product will want some time to realize a return on their investment before signing up for a subscription. What will be their transition path? For how long will traditional support and maintenance agreements be honored, and what will be your transition plan for customers covered by those agreements? 3

5 How can our employees and organizational structure best adapt to support the new business model? Transforming to a service-based model requires new roles, new skills, and new approaches. Your entire organization needs to be ready to embrace these changes. For Providers More predictable revenue stream. Reduced time to market for new offerings. Benefits of Servitization Ability to offer new functionality rapidly to all customers throughout the world. Greater agility and adaptability to respond to new technologies and changes in market demand. Decreased product support costs through efficiencies of centralized deployment and maintenance. Ability to quickly access new markets globally. Ability to gain new insights into customer usage and leverage understanding into new products or increased functionality For Business Customers and Partners Pay as you go pricing reduces cost and commitment for technology/product implementation and maintenance. Improved cash flow due to reduction in fixed investments. Potential tax benefits with switch from capital expenditures to operating expenditures Increased employee productivity through the ability to work at their own pace anytime, anywhere on preferred devices and platforms. Improved employee retention and engagement through greater resource access, productivity and culture of collaboration. Reduced facility and utility costs through less technology/equipment implemented "in house." The Essential First Step The transformation from product vendor to service provider is a significant challenge that will touch every part of your organization. Next Step has a proven track record of successfully implementing this new business model, and we can be a crucial business partner. Our team of 40 seasoned professionals will work with your executive and functional teams through the key stages of transformation, as we have done with Adobe, ShoreTel, Cisco, Precise and others. 4

6 Evaluate Next Step s team of experts will benchmark your current situation and assess how each stakeholder will be affected by the transformation, including customers, sales teams, employees, channel partners, IT, operations, marketing, and the CXOs. Plan After identifying both opportunities for productivity enhancements and areas of potential challenge, Next Step will create a blueprint for the transition. This will serve as the foundation for the cross-organizational change process leading to a successful transformation. Execute Next Step believes in execution, and our experienced professionals will collaborate closely with you to successfully execute the plan. This can be from product advisement through goto-market plans and organizational transformation. Field and sales enablement, key for any successful transformation, is the sweet spot of Next Step s expertise. Monitor Making the transition to a service provider has the added benefit of providing you with a constant flow of data about your market, your customers, and how they are using your product. Next Step can help you to identify key metrics as well as set up systems to collect and analyze the data, giving you enhanced insight into your customers needs as well as the ability to bring them better value. Next Step has a proven set of best practices for a servitization transition, delivered through seasoned professionals who are held accountable for ensuring clients receive measurable results. The result is a strong foundation for future growth, scalability, productivity, and increased sales. Engaging Next Step is your first step to success. About Next Step Next Step is the market leader in Go-To-Market programs that improve clients revenue and profitability. Since 1997, Next Step s team of 40 seasoned professionals have made a difference for organizations as they are expanding into new markets, competing in a changing environment and building a sustainable approach to growing results from sales, marketing and people. Clients include Cisco Systems, Adobe, Genentech, and many small to mid-sized technology, services, clean tech and life sciences organizations. For more information on our clients or our integrated training programs and consulting services, please visit or give us a call at