April 25, 2014
Field and support organizations are challenged today to replace traditional service offerings, whereby technical services are provided for a fixed price, to new models where technical services revenues are earned by delivering positive customer outcomes. The most challenging problem is a short-term financial one. As the operating models transition, the service organization finds itself unable to deliver short-term financial commitments, as well as generate the investment dollars needed to enable a successful operating model transformation.
Additionally, customer expectations are increasing, and the company’s executives outline aggressive cost objectives (and sometimes irrational) to the service organization to enable delivery of quarterly commitments they have made to Wall Street. This scenario leads to predictable and unsatisfactory results for all. This article provides specific actions, as well as real-life examples from NCR, on what services leadership needs to do know to ensure they can shift from a traditional service supplier to a differentiated and highly competitive supplier delivering improved customer outcomes.
Service operating models in technology providers are currently undergoing a significant change. Companies are moving along a continuum from a pure product focus to a client or customer outcome-based model. The recent business book, authored by J.B. Wood, Thomas Lah, and Todd Hewlin― three widely recognized tech services experts―discusses this transition in great detail. If it’s not on your bookshelf or notepad, I suggest grabbing a copy of B4B: How Technology and Big Data Are Reinventing the Customer- Supplier Relationship without delay.
The authors do an outstanding job reviewing this transformation in great detail, and it should be number one in your business toolkit. The industry’s evolution to an outcome based focus is going to have significant implications to your shareholders, your company, your services organizations, your customers or clients and your employees. What we will discuss in this session is what you can do to address the significant financial and operational challenges it takes to deliver on the current level 2 business model commitments And create the investment dollars required to start the journey to an outcome based supplier.
The movement from Level 2 to a Level 3 operating model is essentially a change from what has been a traditional CapEx model (up to 70% of the revenues paid up front, product assets and risks transferred to the customer’s balance sheet and future revenues based on annual services charges) to an OpEx model (10-20% of the revenues received up front, assets and risk remain on the suppliers balance sheet and future revenues dependent on outcomes delivered). Figure 1 depicts the challenge that this transition can cause to your financial plans. Service revenues dip quickly on the legacy business model and put immense cost pressure on delivering the current financial plans.
Additionally, the new offerings are bringing in significantly less short-term revenues, yet are costing more. This area shaded in the middle of the “fish” above is the financial challenge created by reduced or delayed revenues and increased costs that are created in the early phases of your company’s transition to the new Level 3 operating model.
Let’s see…you are going to be pursuing a strategy that in the short run delivers falling revenues and increasing costs…not exactly a winning recipe for most public companies that are obsessed on delivering quarterly financial results to ensure they meet commitments to Wall Street and their shareholders. Given that many of these companies have their largest revenue streams and cost bases tied up in their services organizations, often the lion’s share of the pressure is put on the existing service leadership to take “whatever” actions are necessary to deliver short-term financials.
Since most level 2 service organizations still operate as a cost center “whatever” is simply code for aggressive cost actions that may or may not pass the good sense test. If that isn’t enough to scare off those pursuing an outcome based model here is another unsettling thought to consider. Most tend to be overly optimistic in their initial assessments. The transformation time will take longer than you think, the legacy or level 2 revenue streams will go down quicker than forecasted and costs to set up the new model will be higher than planned for. If you want to survive the transformation you need to initially under commit and over deliver to build up credibility for you and your team.
At RTM Consulting, we have developed a four pronged strategy that can be effectively executed to help service companies manage the many challenges of a level 3 transformation. Essentially it helps “squish the fish” by accelerating cost savings in the level 2 model, ensuring profitable revenue in the new operating model and shortening the time it takes to get to level 3. It is a four phase approach that puts initial emphasis on the financial side of the equation to ensure that the company and service leadership can thrive and survive in the time it takes to successfully complete the transition.
The simplest definition of optimization is to make something as effective as possible. There are actions you can take to optimize your current business model and ensure that you can deliver the shor- term financial plans, as well as provide investment dollars you will need for your B4B journey. It is recommended you start by getting your delivery channels aligned appropriately by Shifting to the Left and then optimize the costs within each channel (see Figure 2).
Bill Steenburgh leads RTM Consulting’s Field and Support Service practices. He has extensive executive experience successfully leading complex Services operations in multiple global companies supporting enterprise and consumer customers in all industry segments.
Prior to RTM Consulting, Bill worked at Xerox where he was the SVP of Xerox Services. At Xerox he had responsibility for a fully integrated operation that provided traditional hardware services, software/solutions technical support, professional services and outsourced document managed services with direct management responsibilities of up to $5B in revenue and over 25,000 employees. Additionally, he was VP of Xerox's North America's supplies business. Before joining Xerox, he also held executive roles with Xelus, Danka Corporation, and Eastman Kodak.
He is a founding executive board member of TSIA.
Keep the conversation and education moving forward. RTM Consulting will present four key sessions taking place at Technology Services World (TSW) Best Practices, May 5-7 in Silicon Valley:
Bill may be reached at bill.steenburgh@RTMconsulting.net.
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