Tuesday, January 7, 2014

New Age Services Providers – Not Your Father’s Manufacturer

All businesses generate revenue through the sale and delivery of either products (tangible assets) or services (the experiential outcome of the application of products).  Some operate in both spheres.
I tried to locate research to represent the relative percentage of GDP that comes from products versus services, but I failed.  If anyone can locate that fact set for me, I’d be most appreciative.

My instincts tell me that there is a non-trivial shift underway from product-oriented commerce to service-oriented.  Further, I think this shift is accelerating.
Companies that previously thought of themselves as being firmly planted in the product side of the economic community are being compelled to operate as Services Providers.

Now, in the realm of IT Services and Business Process Services, the Service Provider universe has been a well-defined market segment.  It’s easy to identify those companies whose reason to exist is through taking the products of others and integrating those products into operating services.  These IT/BP Service Providers serve as intermediaries between the product manufacturers and the end consumer of the ultimate Service.  I’ll post in the future about why this model has failed to achieve its promises over the past decades; there’s plenty of other sources of opinion on that topic published in the blogsphere in the interim.   (Among the best:  Horses for Sources.)
The really interesting aspect of what’s happening today is the risk that the traditional IT/BP Services Providers will be disintermediated.

This is because the product manufacturers are seeing an ever-increasing percentage of their business shift to “as a service” delivery expectations.  Further, those expectations take the form of delivery models that are far removed from the “outsourcing” model that the IT/BP Services Providers have used for so many years.  End customers are looking to avoid capital expense associated with buying discrete products, and also avoid the many distasteful nuances of outsourcing.
As interesting a topic as that may be … the tipping point, in my opinion, comes through the fact that the “As A Service” business model is being applied far beyond the realms of traditional IT Services and Business Process Services.

Let’s say that you’re a company in the manufacturing or distribution industries.  Your business model is tried and true – pivoting on the production, shipping, and installation of tangible products such as refrigerators, or air conditioning units, or roofing shingles.
The value chain that you operate within ends with a customer taking delivery of your products.  Perhaps you provided installation services, and perhaps you offered repair/maintenance services.  But, the point of revenue-generation for your business rests with the customer taking title to your products.

Your customer, on the other hand, was burdened with the application of your products.  That is, the end result that your product is meant to achieve – preserving food items, cooling a building, protecting a home from weather – is left to the customer. 
But, along comes a clever competitor that sees a way to disrupt your industry.  The competitor elects to leverage some of the many new technologies available (such as social media, big data analytics, geolocation, biometric authentication, etc.) to change the paradigm. 

Perhaps that competitor redefines your industry by converting a traditional product business to one focused on services.  The end customer is attracted by a few fundamental truth regarding services business models:

Ø  Shift from a capital expenditure to an operating expenditure

Ø  Assurance of achieving the ended application

Ø  Access to derivative, or meta, data/analytics regarding the products employment

Ø  Avoidance of costs associated with operating the product

Ø  Improved efficiency through greater leverage and attention to detail

Ø  Potential to lower costs, or even generate revenues, from the adoption of a service

There are more of these virtues specific to particular situations.
The point is … now your product business (and, perhaps more to the point, the distribution industry with which you’ve traditionally partnered for service to customers) is being upended.

In order to remain competitive, a highly scalable, flexible, and on-demand business model is critical. And, expertise is required in the emerging technologies that are dramatically transforming the market, shaking up traditional industries by spurring increased competition and igniting a fresh wave of innovative business models.  As a market leader, with a deep legacy, you know that these technologies have lowered the barrier to entry for new competitors, and increased the expectations of your customers.
“As a Service” offers a compelling alternative for organizations who would like to focus their energy on building a differentiated service offering as opposed to building, operating and maintaining traditional product-based infrastructure. While this may be self-evident for the IT Services and Business Process Services segments, I see it happening across many, many product-based industries.

Take heed:  manufacturers and their distribution partners need to learn from the experience of the IT and Business Process Services industry.

Every company is a participant in the “As a Service” economy, either as a customer, subscriber, service provider, or service partner.  I think we will see many more traditional product companies shift to being Services Providers through transformation of their business models and technology-enablement of their products.  The winners will be those that can turn their legacies into assets/accelerators, and avoid the risk of perpetual drag through inertia.
This means that the sands we thought were stable are shifting for buyers and providers of everything.  Internet of Everything?  Certainly.  Delivered “As A Service.”  Fun times in the “As A Service” Economy.


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