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Hidden Revenue
by Ian Ross, Rachel Berg, Kevin Keegan
Featured Blog: Tech &
Telecom
26 April 2011
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Service Operations as a Growth Engine
For most product-b ased technology companies, service organizations are typically viewed as cost
centers. As such, they are missing the opportunity to transform these organizations into powerful sources
of revenue growth. Here is a glimpse into how progressive companies like Xerox Corporation and Philips
Healthcare are doing it.
Technology companies across industries have long operated on the premise that sustainable revenue
growth comes from “the product”—through added features and functionality, extended product families, or
all new offerings. Many companies say their service organizations are critical to product adoption and
usage, but in reality the role of service is largely relegated to answering questions and fixing problems.
Consequently, when costs need to be cut, the service organization is among the first areas to feel the
knife.
The past couple of years are a case in point. To survive the harshest downturn in decades, a wide range
of technology companies cut their warranty terms and service operations to the bone, and plowed these
cost savings into price reductions as a way to maintain market share. As the recovery strengthens, these
companies have dug a hole for themselves—a new lower price peg for the features and services being
provided. They’ll also have to contend with a decline in customer perceived value and a cheapening of the
brand, which can be hard to overturn.
Leading companies are taking a different approach. Rather than viewing the service organization as fat to
trim, B2B companies like Xerox Corporation and Philips Healthcare are turning this traditional cost center
into a powerful source of high-margin, post-sales revenue growth. Key to this transformation is the valueadded services and new solutions offerings. These are not the repair and maintenance services
companies commonly provide, nor are they the consulting services that companies like IBM started
selling in the 1990s. They are an entirely different category of services. Rather than change or update
product features, the goal is to increase customers’ understanding of the functionality that already exists
on the products they own, thereby allowing them to realize much greater value from these purchases.
The business equipment sector offers perhaps the most illustrative examples of this trend. Whether
providers of document management equipment, medical imaging devices, or telecommunications
switches and routers, companies are drawing on field service technicians’ knowledge of their products
and customers to determine which services would best meet customers’ needs and add the most value.
The results of this new revenue model are compelling. Analyzing the performance of 12 leading
equipment companies across the electronics value chain over the past five years, we found that all have
seen substantially higher revenue growth from services than from products (Figure 1). Over the same
period, the same 12 companies have seen their service revenue gradually assume a larger percentage
of profit margins (Figure 2).
These companies are onto something. As Thomas Lah, executive director of the Technology Services
Industry Association (TSIA), recently pointed out, the growth of service revenue over the past five years
strongly suggests service capabilities will now be critical for success (Service Revenue Trends, TSIA,
October, 2010).
Driving high service revenue growth, however, requires a major transformation of the services
organization—a daunting task when thousands of in-house and outsourced professionals are involved.
In our experience, it is important to begin with a clear articulation of the value proposition of the new
service offerings. This step paves the way for the company to reposition the service offerings both
internally and, more importantly, in the eyes of the customer. The company then needs to address the
roles of the service workforce in the new business model.
Articulating the Value Proposition
Defining the new service value proposition is critical for getting buy-in across senior management as well
as from value chain partners. They need to understand the incremental revenue growth the new services
can provide.
The consumption gap. Consider a scenario in which a customer already owns or leases a product, but
may not be acquainted with all of its features and functionality. As time passes and users come and go,
the adoption of the product’s full range of capabilities reaches a plateau or even declines. The difference
between the value a technology-based product provides and the value the consumer actually gets from it
is what J.B. Wood calls the “consumption gap” (Complexity Avalanche, 2009).
“Customers often don’t realize what they could be doing with the products and solutions they have
because of how rapidly technology is changing,” says Bill Steenburgh, senior vice president of Xerox
Services. “It’s not that they don’t understand the product—it’s that they don’t understand the product’s
features/functionality in a way that allows them to drive business results, solve problems, and gain new
features/functionality in a way that allows them to drive business results, solve problems, and gain new
opportunities.” Yet rarely does anyone from the original equipment manufacturer (OEM) visit customers to
ensure they are using or even aware of all the features and capabilities of the product.
Take, for example, a law firm that buys 15 new desktop printers for each one of its partners so they can
print confidential information. Little do they know that the powerful multi-function device outside of their
office area is equipped with robust confidentiality features—a waste of money, space, and technology for
the law firm. And because the printer company hasn’t determined a compelling way to inform the
customer of these services at the point and time of need, it loses the additional sales opportunity.
This is just one example. For large global OEMs, the consumption gap can represent hundreds of
millions of dollars in unrealized revenue and underperforming R&D investment.
Drawing on the theory that Wood has articulated so compellingly, we’ve identified certain key practices
that can help companies close the consumption gap and realize revenue growth.
The opportunity, quantified. The first steps in creating a value proposition are to quantify the size of the
consumption gap across the installed base and to identify the practical portion of the gap to be
addressed. This can be tricky because not everyone uses the same product to the same degree. Not only
can the degree of utilization vary between companies; it can also vary widely within the same company,
with some employees using many features of a given product, and others using only a few.
By looking at how the entire installed base of customers uses the product as a whole, companies can
generate a usage distrib ution curve (Figure 3). This curve provides key information regarding how many
customers are making full use of the product and how many are not.
The customers around the mean of the usage distribution curve appear in the area we call the
addressab le consumption gap. Though active users of the product, these customers are far from
maximizing their product investments. Companies looking to drive significant revenue growth from their
service offerings should target these customers: They represent high-opportunity targets and have the
potential to move to the right on the usage distribution curve. Such customers are likely to value any
additional product utilization that could translate into substantial cost savings in the long run.
Even the customers who are not interested in purchasing any new services would welcome a visit from a
Even the customers who are not interested in purchasing any new services would welcome a visit from a
service professional who can demonstrate how to benefit more from their equipment. These customers
are likely to become more loyal, with a propensity to purchase more from the company over time.
When it comes to determining the size of the actual opportunity, various factors must be taken into
consideration, including the current customer base, the inclination to purchase additional service
offerings, and the impact of increased loyalty. The service organization with a deep understanding of the
customer is perfectly placed to lead the way.
Philips Healthcare, for example, is using its services teams to quantify and address the consumption
gap among the company’s medical imaging equipment customers. The company’s Utilization Services
group helps customers acquire objective data about their utilization rates and then works with them to
make improvements. In some cases, Philips has uncovered consumption gaps as high as 40 percent—
that is, 40 percent of the equipment’s value is not being tapped (“Realize Your Full Potential,” Philips
Utilization Services brochure, 2009).
Rethinking Service Positioning
Once the consumption gap has been quantified and value proposition established, the company should
assess its service positioning next. Most service organizations are positioned to meet or exceed service
level agreements. The organization acts as “downside protection” for customers, ensuring that if their
equipment goes down it will be restored with minimal business interruption.
New attributes, new promise. To aptly convey the new role that services will play, the company needs to
reposition the offering around the set of attributes that customers believe are valuable. At the same time,
the new attributes must reinforce the company’s overall brand positioning.
Repositioning the new services correctly is of the utmost importance because it will change not only the
service promise, but how the company delivers on that promise. The new positioning will determine the
service organization’s strategic objectives and the operational changes needed to meet those goals.
C-Suite support. The new services positioning will have a major impact on other organizations in the
company, including product development, marketing, sales, and finance. For this reason, it is crucial to
get support for the repositioning from senior executives across the company. This task can be particularly
challenging because senior executives who have traditionally viewed services as a cost center are often
skeptical about their ability to drive growth.
Senior executives must understand the value of the service organization (Figure 4). They need to see that,
compared with their counterparts in sales, service professionals have far more extensive interaction with
their customers and therefore can better identify their needs. Service professionals also know the product
and the industry better. Because of this expertise, they are in a position to evolve into the role of trusted
business advisor.
Transforming the Role of the Service Workforce
Given that the technical and professional service organizations are responsible for delivering the service
promise, it’s critical for them to be on board. There is likely to be some inertia among some long-time
service employees accustomed to doing traditional fixer/implementer work. So, as a first step, senior
management needs to clearly communicate the strategy for repositioning service operations.
Employee assessments. Not all technicians will have the skills or the inclination to take on a revenue-
Employee assessments. Not all technicians will have the skills or the inclination to take on a revenuegenerating role because it will be too far out of their comfort zones. Therefore, senior managers need to
assess all service employees both in terms of their ability to generate revenue at the customer’s site and
in terms of their willingness to transition to the new role.
In parallel, senior managers should craft a realistic view of what the ideal revenue-generating service
roles might look like in detail. Then, with both current and ideal perspectives in hand, they can determine
what percentage of the service population is willing to make the journey and what training will be
required.
Training needs. Equipping the service workforce with the desired skill sets involves two dimensions:
training or retraining on the functionality of the products so employees have a clear picture of the
solutions being offered, and training in skills that may not have been developed fully. Service
professionals need to know, for example, how to broaden and deepen their knowledge of the customer’s
business, which goes hand-in-hand with being better able to assess market dynamics and trends.
Perhaps even more important, service professionals also need to develop consulting skills. They must
understand how to engage a decision maker in conversation and translate market trends into actionable
recommendations. Xerox’s Steenburgh notes, “You’ve got to become more strategically relevant to their
business and ensure that they understand how to get the full value from the products.”
A change of this magnitude does not happen overnight. “This is a huge transformational journey for our
organization and our employees,” says Steenburgh. “We’ve got a comprehensive plan in place to
redefine our work, reshape our capability, retool our capacity, and re-energize our people. It’s early in the
game and initial indicators are positive, but make no mistake about it: There is an incredible amount of
work still to be done.”
Taking the Next Step
The gap between product and service revenue is rapidly closing. It won’t be long before services surpass
products as a source of incremental revenue for technology companies, and no doubt for other kinds of
business equipment providers as well. Companies that do not want to be left behind must look beyond
their sales force and product development teams to drive revenue growth.
The service workforce is a critical resource waiting to be tapped. Not only can these employees identify
customer needs—they can also help deliver new solutions that will meet those needs. This new revenue
model does not happen automatically. It requires thoughtful execution of a services business
transformation and a commitment to doing things differently over time.
To decide if the new services revenue model is worth pursuing, technology companies need to evaluate
their margins and services operations. They must assess potential revenue-generating opportunities
and the kinds of investments needed to capture them.
The transformation to a service-based revenue model does not happen quickly. Steenburgh notes that it
took Xerox Services about a year to get his new service strategy developed, aligned, and understood
internally. That means today is a good day to start planning for the necessary transformation.
About PRTM
Since 1976, PRTM has created a competitive advantage for its clients by changing the way companies
operate. PRTM management consultants work with senior executives to develop and implement
innovative operational strategies that deliver breakthrough results. The firm is a leader in operational
strategy, supply chain, product development, and customer value management. PRTM has 18 offices
worldwide and serves major industry and global public sectors.
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