Business challenges driving the need for change
In our research we went looking for the triggers of this change; why should product manufacturers and technical companies transform themselves towards a services business? The companies we interviewed all see the need for developing new business models, since in this industry, almost all companies face these 3 challenges:
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The need to establish new business models that meet customer demands. Customers have new and greater expectations of their suppliers. So how can you meet these demands?
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Pricing pressure on products requires that companies look for alternative revenue streams.
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Legacy IT-systems which support the ‘old’ products and services but are not able to support new services models and therefore slow down change.
A cultural change is a critical success factor
In short, the urgency to change is there. But we also found, as we expected beforehand, that change is never easy. Therefore, we asked companies who showed a significant increase in services revenue over the past few years what they saw as important factors contributing to their successful transition.
Of these companies 95% had a clearly defined services strategy in place. And in 62% of these companies, services were considered as the most important growth engine. What these figures tell us is that the transition is being led on an executive level and that the whole organization is engaged in this change. So, culture is a huge driver for success.
When the company’s culture plays such an important role, it also becomes clear why making the transition to new services-led business models is a difficult one. Not only must employees change their way of working, a company might need new people with different kinds of expertise, for example consultancy skills. It also requires new management practices, think of the remuneration of employees. Are your people focussed on sales or solutions? Are they fixed on long term revenue and a customer’s life cycle, or focussing on orders only? This change of governance and behaviour often takes time and needs a clear and strong vision of the management.
Best practice: from co-creation to co-innovation
Culture and behavioural change is one of the key success factors that we identified, however we also found several additional best practices for success. One great example we found at a leading company in industry automation. This company has embraced a concept we call co-innovation, which means that the company and its customers work closely together developing a full solution for a customer issue, thinking beyond a potential product.
Most of us are familiar with the concept of co-creation. For example, in health care technology companies this is quite a common practice where customer and company work together designing a product. But co-innovation goes further than that. This company develops a full solution, together with his client, delivering the business outcome and result the customer is looking for. This results in even more added value, including excellent new service opportunities. Think of managing environmental services or adding cyber security services to their solution. These opportunities were previously unavailable to the company but as a result of the new conversations focused on customer outcome, the opportunities come into play.
Concluding, we can state that to realise growth in services and to prosper in a services-led world, a company needs a clear strategy on executive level, and a strong vision on change management to build a culture that supports this transformation. Learn more about the research project Drivers for Growth in Service below.
Martin Gilday is a Senior Consultant working for Noventum. This blogpost is based on an episode of a podcast series ‘Drivers for Growth’, published by Noventum.
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