Tuesday, May 24, 2016

Playing the Innovation Card

Playing the Innovation Card

In 1964, U.S. Supreme Court justice Potter Stewart famously characterized pornography with the quote, “I know it when I see it.”  The same is true for innovation in the art of commercial services.

I’ve been party to hundreds of commercial outsourcing arrangements – serving on the side of the buyer and on the side of the services provider.  Invariably, the topic of innovation arrives at the table from one party or the other.

Enterprise buyers seek to assure themselves that any resulting contract won’t yield “same mess for less” by challenging the contending providers to commit to a process whereby innovation in the services is confirmed and committed.

In a reinforcing fashion, the industry service providers, eager take the bait, offer up vague and unspecific promises of future features and functions that evolve with the broader market.

I liken these conversations to mutual assured misunderstandings, and ultimately disappointment and dispute. In short, both parties are speaking without communicating – and setting expectations that will fail to be met.  Buyers think that evolution of the services is baked into the price, while providers think they’ve locked down scope with a menu of future options available for additional fees.

The guidance I apply to these situations starts with the buyer, and the principle that nothing good comes without a cost. If innovation in the services is important, then it is essential to understand how that innovation is funded.

Buyers/Subscribers to an outsourced service are expecting that they are the beneficiaries of investment made by the services provider to serve a market of customers.  That is, there is leverage in the service model that spreads costs relating to the design, evolution, and delivery of the services across a multitude of like-minded buyers.

With this model in mind, it is reasonable to expect that the service provider is continually testing the market that it is serving to understand future opportunities to enhance and evolve the features and functions, drive down service costs, and improve the risk profile of the services it is delivering.  That’s just good business practice, right?

Well, if the commercial arrangement is viewed (by either party) as being “bespoke” (custom-made to fit a particular buyer), then the economic logic erodes rather obviously.  My caution to buyers: if you’re the only subscriber to a service, then innovation will take the form of specific and defined commitments that can be measured and priced distinctly.

But that’s not the way that most companies want to buy innovation in a services arrangement.  They don’t want to pay extra for unique and proprietary enhancements. They want the innovation to come as the market evolves with new capabilities.

Once this economic reality is appreciated by the buyer, it’s time to focus on buying “As A Service” offerings that are established in the marketplace and which are serving multiple subscribers. That orientation yields a very focused conversation with the contending service providers and removes much of the ambiguity around the term innovation.

The counsel I provide to ambitious service providers is to be very well-prepared for this form of discussion with an educated and informed buyer.  Pretenders will be smoked out quickly and failure to pass the test of a worthy innovation model will likely result in disqualification for further consideration.

The successful services provider will frame the topic of innovation through four dimensions that are directly relevant to the buyer’s future-view of the services continuum.  They include:

  • The reach that the service provider has as they serve markets and sense innovative ideas to assess and invest in over time. This is an important test – whether the provider is serving a broad enough base of customers with essentially identical services.
  • The cost of acquiring and developing those ideas, and the funding sources for such investments. Service providers need to affirm that they have an investment model in place.
  • The risk involved in trying to turn them into marketable products, including processes for customer engagement. The risk of innovation is worth emphasizing, and using as a key selling point with the buyer. And,
  • The speed with which the new features and functions can be brought to market. This often entails promotion of partner relationships, innovation laboratories, lighthouse clients, and the like.

Innovation need not be a four-letter word.  It is a central thesis of true “As A Service” contracting conventions. Aspiring service providers can use this topic to differentiate from lesser-prepared competition, but the sales process must be genuine and transparent around the topic.

Conversely, buyers who want assurance that innovation is baked into the services need to insist that the principle of buying market-defined offerings is applied in the source-selection process with prominence.

In these way, both parties will know innovation when they see it.

Peter Allen applies many years of operating experience as a top executive and strategic advisor for companies of all shapes and sizes, with focus on technology-enabled business services. He is now Chief Evangelist at Peter Allen & Partners and Senior Advisor for Alvarez & Marsal.

Image: midwest.communications

Tuesday, May 17, 2016

The Art of the Services Sale

A few years ago I sat with a senior executive of a global consumer products company reviewing our week’s findings.  We had just concluded a parade of prospective services provider presentations, and it was time to reflect.

Dave was a finance executive, accustomed to quantitative precision. Our week had been spent listening to six services companies try to impress upon Dave their unique abilities to service his global operations.  Precision was as far from reality as one could imagine.

As our reflections concluded, Dave asked one final question of me.  “Can you explain to me why this industry is fixated on capabilities, when what we’re trying to buy is services?”

Dave was frustrated by what he had just experienced – broad and general claims about undefined and unmeasurable expressions of effort that were entirely disconnected with his business priorities.  Not from a minority of companies, but from all of them. Having heard from industry peers complaints regarding the lack of innovation via outsourcing, Dave’s doubts about the outsourcing proposition were only exacerbated by the experience.

Dave compared what he had seen presented by the leading companies in the fee-for-service outsourcing industry to what his company had achieved for themselves via a Global Shared Services mode of operation.  He looked for a service catalog, committed service levels, volume-based pricing, a talent management utility, alignment of rewards for productivity … all of the traits that typical service companies employ. He had hoped to find new sources of leverage that would accrue new classes of benefits.

Outsourcing is hardly a novel concept.  It’s a business convention that has been in play for over a hundred years.  That reality made Dave wonder how it could be that the IT Outsourcing and Business Process Outsourcing industries could be so backward in the definition of services.

In trying to explain what he had just experienced, I noted that the ITO/BPO service providers generally trace their roots to one of two heritages.  Very few providers are built-for-purpose service providers.  The mindset and management muscle of these companies are informed by a grounding in systems integration or offshoring.

Companies with a systems integration DNA are very requirements-driven. They are literal.  They thrive in solving problems as if they’d never been solved before – approaching each situation with an eye to building a unique and distinct solution.  Commonly, the end result is a well-engineered design but lacks scale or market-based application.

Conversely, companies that trace their origins to the offshoring industry are much less fixated on the specific requirements, opting to promote value by recruiting, cultivating, and deploying the best talent.  These providers rely on the Client to define HOW a job is to be performed, and pride themselves on finding excellent talent to complete the tasks.  The companies tend to standardize work very well and deliver with predictable results.  But, the scale potential is limited. Wage arbitrage is a lever that can be pulled only a few number of times.

As one might imagine, both of these classes of services companies tend to promote capabilities.

In the commercial services industry, the term “capabilities” is a red flag.  A capability is considered the inverse of a commitment.  A systems integrator is certainly capable of building an elegant solution to a set of requirements.  And, an offshore services company is equally capable of excellent human capital management.  Neither, however, conforms to the expected definition of a “service.”

Today I guide both buyers and providers of commercial services around the lexicon and terminology of alignment. Service providers are using different words, and making new claims, around their commitment to progressive forms of offerings.  Some are using the “As A Service” phrasing.  Some are promoting outcome-based pricing.  Yet, the depth and reality of their commitment to true services proposition are easily tested by discriminating buyers.

On the other side of the equation, many companies profess to want to buy market-based service offerings yet insist on imposing a spectrum of stale and constraining requirements on the prospective service providers. Having it both ways rarely works.

I’ve found that a handful of principles are effective tools to foster the conversation around buying and selling/delivering true “As A Service” relationships.  One of the more significant is “Buy from a Market.”

The parties must recognize that buying standard and industrial services is the foundation for a true “As A Service” relationship.  At its heart, prescription of a solution by the buyer is to be avoided at all costs.  The service provider’s ability to drive leverage is central to making this model work. 

Relatedly, a more comprehensive and scenario-based business case format must be used to capture derivative benefits that are not customary in traditional services contracting.  And, there needs to apply different forms of diligence, ultimately proving the Supplier’s commitment to a Services life-cycle and existence of a market of like-oriented subscribers.

To drive this point, I often facilitate conversations around the innovation investment model for the contracted services.  Clients are expecting their providers to have a strategy for funding the evolution of their services over time.  If a provider stumbles on this question, it’s a sign that they are not fully committed to being in the “As A Service” business.

For a service provider to win in this environment, they must break down the traditional silos of service capabilities and show up with a unified offering in all respects.  Showing up with a team of people who carry the flags for their own parochial business elements only reveals the lack of alignment and integration behind a built-for-purpose service proposition.

Acceptance of new forms of risk is table stakes - and directly related to the fact that the provider is serving a market, not a sole client.  An effective selling technique is for the service provider to be clear on the risks that they are taking on by committing to the commercial services under consideration. In earlier forms of outsourcing – whether via a systems integration or offshoring worldview – the provider often allocated considerable risk to the Client.  “As A Service” shifts this risk, and that fact should be clear in the sales process.

Transparency requirements will increase, in various forms. The term “Service Catalog” must be pervasive – in how the provider thinks about and communicates its propositions, and how the Client will manage variants in service classes.  Further, the approach to diligence on the Client’s environment is critical – the provider must be expert at knowing whether it’s offerings are fit for purpose.

In a fee-for-service world, Dave expects a market-based, fee-for-service conversation.

Peter Allen applies many years of operating experience as a top executive and strategic advisor for companies of all shapes and sizes, with focus on technology-enabled business services. He is now Chief Evangelist at Peter Allen & Partners and Senior Advisor for Alvarez & Marsal.