Deciphering the DNA of how things are done
WE DON'T need to buy a car. We can pay for a ride. We don't own bicycles. We pick it up off the streets, leave it back when our ride is done. Companies don't own photocopiers. They just pay lease charges for its use. They don't own software programs. They just pay for the use. It's not even on their premises anymore.
There is strident "servisation" of product markets. However, much before these trends, product companies diversified into services. What lessons can we learn from them?
Service has not only proved to be a business with better margins, it has also gradually become the chief source of competitive advantage where products tend towards commoditisation. Services have also expanded in scope, thanks to customers' spoken and unspoken demands and digital technologies.
Services business is attractive to product companies for many reasons like additional source of revenue, higher margins, source of competitive advantage, one-stop solution for customers and customer loyalty. New customer expectations like innovation, strategic fit and solution to managerial issues have added to the landscape.
What new challenges are to be tackled when service revenues start to overtake the product streams or worse, when product divisions lose the star status that they may have enjoyed? What are the resulting organisational and people dynamics? How should such companies develop the service edge and keep evolving?
The answer lies in how well they tackle four areas - strategic intent, cognitive service culture, organisational transformation, and new frontiers of customer management.
Strategy
Your service strategy may be different from your product strategy and has to be consciously chosen. Many companies make the mistake of adopting an afterthought residual approach or, worse, no strategy at all. Can you make your service strategy stand on its own legs (and not unduly dependent on your products)?
The service-scape must go beyond traditional mindsets. GE Healthcare's "AssetPlus" solution enables intelligent asset management that gives data-driven insights to help optimise utilisation, increase availability and reduce operating costs of healthcare equipment in hospitals. (Services account for 43 per cent of GE healthcare division's revenue in year ended December 2018).
Companies will need to choose the one or two aspects of service they want to excel in and be relevant to the core customer segment. Companies who make tentative strategic choices suffer from weak price power as well as lack of sales conviction.
The challenge is to convert your "nice to have" services to "essential or semi-essential" ones. Solar City provides an "all in one service" that allows homeowners to fully equip their houses for solar energy at no upfront cost. It offers a seamless service bundle that integrates all financing, installation, maintenance and energy and cost management.
Apple, known as a product company, reports service revenues of US$40 billion via share in App development, subscription services (Apple Music etc.), warranties and AppleCare, income from search engines etc. all of which are estimated to have gross margin of over 50 per cent.
Cognitive service culture
All service businesses are people-dependent and people-intensive. The best strategies can flounder if an organisation has not established a good service culture. Service culture cuts across the organisation and is not restricted to the customer-facing people. It is the 'default' behaviour of every employee to a service situation, even if it is a new situation.
To that end, organisations need cultural education, orientation, modelling behaviour, benchmarking and incentives.
Service culture can be taken to a level of being branded and iconic, as we see in pure services players like Disney, Fedex or Shouldice Hospital, Canada.
Organisation and work flow
Xerox Corp generates 55 per cent of its revenues from services, including subscription rentals etc. It has reorganised its service delivery by empowering, training and tooling channel partners while directing the company's own capabilities to innovation, product development and strategic marketing.
For people-intensive service businesses, it makes sense to farm out the last-mile activities to nimble channel partners with lower cost structure. Investment and closer monitoring is however necessary to ensure high service standards and a seamless customer experience.
Atlas Copco, a Swedish giant with a global turnover of over US$10 billion from compressors, power equipment etc. has more people working in the service businesses rather than their product business. Service business is skill-intensive whereas product business is scale-intensive. Services form 34 per cent of their revenues (2017-18). The service organisation is separated right below the industry segment leadership.
Customer management
- Customer management has four facets:
- Enhanced convenience: As managers digitalise their personal lives significantly, their expectation from vendors at work will increase dramatically. Companies need a strong digital strategy to improve transactional ease.
- Depth of advisory services: General information is available on tap, but relevant and more sieved analysis is demanded from vendors. Account managers who deal with customers are expected to provide this intelligent service.
- Feedback and communication: A top service company never neglects a customer, as customers defect unannounced. A powerful loop of communication, feedback and corrective action is a key to managing customer's fatigue, stagnation in relationships and ego.
- Data-based services: Opportunities for IoT-based machine tracking, performance tracking and added services have leapfrogged thanks to technology and big data analytics. Caterpillar, whose services constitute 33 per cent of revenues, has hooked up 850,000 of its customer machines to cloud, with precise planning of maintenance and tuneup schedules. Even governments are improving citizen experiences through such data capture and exploitation.
The success of the service business comes from the synergistic effect of these four elements rather than any one. Thus the DNA (of how things are done) becomes the competitive advantage.