Are you Getting the Most from Services-Based Revenue?

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by Michael Franken, Partner

Economic Reality and CEO Expectations

In 2008, services drove 75% of US and developed country gross domestic product (GDP). This is up 50% from the late 1950’s when services accounted for about half of GDP.1 At 2050, services value will stabilize at 80% of GDP.

Firms constantly seek to grow revenue, profit, customer relationships, market influence and other related measures of success. Based on input from 2,000 executives, Gartner found “increasing enterprise growth” is the #1 CIO’s priority for 2011.  “Attracting and retaining new customers” follow.2

In IBM’s 2010 survey of views from 2,000 CEOs, over 70% said they expected that customers desired “new or different services” to a very large extent.3 20% more rated this ‘important to some extent’.

This evidence was confirmed by a recent Economist Intelligence Unit study, sponsored by Deloitte: 4 ‘Expanding or diversifying product / service offerings’ was cited by 46% of executives as their main strategy for company growth.  Only ‘expanding US-based target markets’ gained a higher rating (56%).

Benefits from Services

Services can yield new revenue, often with regularly occurring income streams and attractive profit margins. Services can help firms differentiate in the market, are tougher for rivals to copy vs. products and help counter pressures from low-cost competitors.

Services can raise customer intimacy and loyalty. As cited in The Wall Street Journal, manufacturers rated ‘improved customer relationships’ as the #1 benefit from transitioning to services sales.5 Other highly rated benefits focused on better meeting customer needs plus gaining more share of their spending.

Challenges to Building a Service Business

Organizations often face obstacles to gaining profitable services income. Success with a services business requires that the company obtain deep knowledge of how customers do their job. For product sales, general knowledge of the industry and customer issues usually suffice.

Sales culture and incentives often need to change. Adding services to compensation structures with long, deep product focus is hard, along with convincing buyers about services value.  Sufficient delivery and support expertise is required (at appropriate capacities, experience levels and often in the right geographic location). Strong leadership, financial commitment and effective change management are key to sustain market-focused, competitive and relevant services.

Closing

Economies around the world are now broadly recovering from ‘the great recession’.  Pubic sector, private and corporate investments are more freely flowing into new initiatives.

Thoughtful strategic planning and operations of services-related businesses may well become engines for competitive advantage — bringing industry ‘winners’ the associated financial and market-based success.

So, are you giving enough focus to seeking (and getting) your ‘fair share’ of financial and market benefits from services?

References:

1 “Service Science Progress and Directions”, Dr. James Spohrer, IBM, 12/8/10

2 “Re-imagining IT: The 2011 CIO Agenda”, Gartner, January 2011

3    “Capitalizing on Complexity: Insights from the 2010 Global Chief Executive Officer Study”, IBM, 2010

4 “2011 Report on America’s Economic Engine”, Deloitte, http://www.deloitte.com/us/pr/dges/2011perspectives

5 “Beyond Products”, Dr. Stephen Brown – Arizona State University, The Wall Street Journal, 6/22/09

 

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