Same Same

but differentSuccessful service development in a product-focused environment

Having emphasized the importance of services in strategy statements for quite some years now, most large Scandinavian industrial firms have realized they also need a more structured approach to service development. In most cases, a corporate staff function is created with an objective to define and productify a portfolio of service concepts. The output of this work, like service portfolio descriptions found on corporate websites and in marketing brochures, often look great and appealing. In some cases, these service development efforts can also show undisputable success in terms of growth in service sales.

Still, our analysis indicates that industrial firms face some challenges as they try to turn services into products. Unlike a physical product, a service can be provided without any official “service product” being developed and launched. At the start of an initiative, the willingness and ability of front-end units to offer services often vary greatly, and those who do tend to use their own local approaches. Therefore, the objectives set for the central service productification efforts often include increased proactivity in service sales, improved efficiency in delivery, harmonized global service levels, higher customer satisfaction and faster build-up of capabilities to offer services worldwide.

Based on our experience from a large number of Scandinavian manufacturing firms, it is questionable if these goals are being met so far. The central

development function is often frustrated with the slow adoption rate, and its lack of mandate to implement a global service portfolio. Front-end units, on the other hand, can be frustrated with what they perceive as “corporate clerks” far away from the front-line reality, adding limited value to their local business.

four fundamental questions for service development

Even if results so far are limited, there is nothing wrong with having high ambitions for service development. Numerous customer satisfaction surveys point towards the large and growing importance of services for the total customer experience and supplier brand perception. For many premium product suppliers, managing services professionally on a global scale will soon become a “must-have” to secure and defend a consistent, premium brand experience. On top of that, there is often a large business potential out there to capture in value-added services.

Normally the issue is not related to ambitions; it is rather how to approach service development in an environment that has been fine-tuned for physical products since decades. Our study findings reveal some common challenges in this process. We conclude that service managers should reflect on four fundamental questions for service development, using one guiding mindset: “Do just like you do with products - only different”.

Successful service development in a product- focused environment

Managing services professionally on a global scale will soon be a “must-have” to secure and defend a consistent, premium brand experience

Use one guiding mindset to answer the four fundamental questions: “Do just like you do with products — only different”

Services are becoming increasingly important for Scandinavian product manufacturers, triggering a need for them to productify also their services. While these intangible products need investment and professional management just like physical ones, there are some clear differences that have to be addressed to succeed. Keeping these differences in mind when answering four fundamental questions will significantly improve the return on service development efforts.

Fundamental question 1: What to develop?Right mix of outputs In companies accustomed to physical products, the definition of an intangible service product may cause confusion. Over the years, we have seen service development processes resulting in nothing more than a simple marketing brochure or a two-page delivery manual. Such “quick-and-dirty” efforts may be enough to support people who are already actively working with the service in the desired way, but it is rarely enough to reach the objectives of global consistency in service quality or increased proactiveness in service sales.However, considerable improvements have been made and we no longer view the quantity of deliverables as the main problem in service development. The challenge today lies rather in the nature and quality of output from the process. Based on our learnings, we would like to broaden the perspective of process outputs along two dimensions:1. What the service is: We still see a very strong

focus on defining service products as activities (what-we-do / delivery) rather than results (what-customer-gets / business).

2. How the organization should be enabled: We see a tendency to rely heavily on procedures, tools and software applications to support sales

and delivery. In other words, development focus is to provide intelligence through systems (hard deliverables from the development process) rather than through the development and empowerment of individuals (soft deliverables)

In the matrix below, we have identified four categories of industrial services, for which we argue that the focus of development output should be different. All service products will need some type of deliverable from each category, but the mix will be different.

In this framework, services suited for the “traditional” focus of development described above will fall into category 1. For example, when equipment OEMs face third-party competition on basic repair services, the only way to compete may be to utilize economies of scale on a single operation level. A specialized OEM service engineer, supported by lean processes and special tools, can perform a certain repair far more efficiently than a small local generalist, which might off-set the higher labor cost of the OEM staff.However, most services developed today are not this well-defined, competitive and repetitive. For many service products, the ability to communicate the customer value, before as well as after delivery, can be the only difference between success and failure. Compare to the trend in complex industrial product sales, where sales people are being taught to shift focus from selling Features to selling Benefits. For true intangible services, which may not have any real “features” to sell, there is simply no option. Consequently, even more efforts must be put into the development process to secure the right sales approach.

WHAT THE SERVICE IS

HOW

TO

EN

ABLE

Delivery “What we do”

Business “What customer

gets”

Hard

Soft

Tools Methods

Processes

People Competence

Motivation

1 2

4 3

For true intangible services, which may not have any real “features” to sell, there is simply no alternative to a benefit-oriented sales approach

Sometimes the development “object” is not supposed to be sold at all. Just like with physical products, you can develop components and modules that should be configured into service products and solutions based on the customer need. In such cases, one needs to clearly separate the development effort for the “component object”, focusing on what-we-do / delivery, and the one for the “solution sales object”, focusing on how to configure sales of this component together with others.For some services, “hard” sales material such as value calculation tools, contract templates and pricing wizards are keys to success (category 2 services). This is where customer value will be built and argued based on specific needs and where standardized delivery processes exist, e.g. custom-made service solutions in well defined areas, like operations or maintenance outsourcing.

Some more advanced services are less suited for codification into manuals; they are rather dependent on the intelligence and judgment of highly experienced individuals. Services such as process advisory and engineering design typically fall into this category. Heterogeneous and complex customer needs, paired with low price sensitivity, create room for investments in people. Development funds should be geared towards developing new subject matter expertise, promoting close collaboration between peers globally and finding ways to off-load bottleneck experts in delivery, in order to increase the business potential (category 3 services). Complex performance contracts, with a high degree of risk-and-reward sharing, require sales people possessing a very broad range of skills, including deep customer insight and high trust, advanced risk assessment and creative pricing skills. These capabilities will always contain a large element of individual judgment that cannot be turned into wizards or decision tools. As with the advisory services, key to success is in this area to develop the individual expertise and share experiences efficiently around the globe, but in this case focus is on the sales rather than the delivery process (category 4 services).

For each service to be developed, the development manager should first reflect on which category the service belongs to, and then distribute effort and outputs accordingly.

Fundamental question 2: How to develop?Iterative process with extensive customer involvement

A structured development process and dedicated investment funds benefit services just like physical products. However, the service development process is much less sequential, and the borders between development, launch and operations are blurred. Furthermore, a service concept and prototype is easy to test with a customer very early in a development process. This is a big advantage in comparison to physical products, where significant investment in prototypes must be made before business validations.

Some more advanced services are less suited for codification into manuals; they are rather dependent on the intelligence and judgment of highly experienced individuals

We recommend a structured approach where process iterations are integrated from the start. Most large product companies use a standardized process for development projects, which is most often relevant and convenient to adopt also for services, as terminology is already well-known in the organization. The process normally consists of a pre-phase to create a Development Plan, and then some development phases like Concept Definition, Pre-development, Validation and Final Development. In comparison with physical R&D, the initial Development Plan is more crucial for services development, for two reasons:

 This is where a solid business case must be made, including how the business case will be validated with customers. The validation is performed primarily to ensure that the service is sellable, other aspects have limited impact on the business case.  This is where the mix of outputs from the process should be configured, as explained above. The resource distribution must be clarified and assigned among the four categories.

Iterations in the process are linked to strict gate decisions. If, for example, the business case should not meet expectations in the Concept Definition phase, the Development Plan should be revisited and remade.

Fundamental question 3: Where to develop?Close to customers

Just like product R&D, service development should be located where you can gain access to the best knowledge. For services, these locations are likely to

be found at the front lines rather than at the head office.In order to attract the best talent, product R&D units are most often located either at Head Office, a large production site or close to leading academic research. They are often geographically concentrated, to leverage the required investments in physical assets. In contrast, the location of service development units should be guided by other principles. Naturally, design of services closely tied to physical products, like installation and basic maintenance, clearly benefits from being close to the product development counterpart. Design for Service is a concept in product development which is still in its infancy, and which requires a deep involvement from service experts early in the product development process.

In most cases, however, a service cannot be designed nor executed based only on the technical product knowledge. The key location aspect to consider then is not access to leading technolog y know-how, but to leading customer know-how. As we point out above, customer involvement in service development is important, and learning-by-doing is a natural part of the innovation process. For services that are application-specific, or where a certain customer segment is clearly leading the way, the global service development center should be located close to leading industry expertise. For example, customers in the automotive industry are known to be very demanding and proactively push responsibility and risk to their suppliers. The rules and conditions of this game are often dictated by the powerful counterparts, so the attractiveness in taking on these contracts in themselves can be questioned. As few suppliers can afford to step away from the large automotive segment altogether, the trick is to transfer the lessons learned from this very demanding environment to more attractive segments and customers. To achieve this, a global service R&D perspective is required and the customer sites are to be viewed as laboratories.The general argument for physical co-location is weaker for services than for physical products, since development seldom requires complex infrastructure.

For many services, the key aspect to consider is not access to leading technology know-how, but to leading customer know-how

However, the rules for attracting the best people are the same. One needs to build a dynamic and creative environment, with a strong team of peers sharing the service values and mindset. As part of a relatively small unit embedded in a large company with a product-oriented heritage, service scientists may have a larger need to be co-located, to feel the necessary collegial affinity and inspiration.

Fundamental question 4: How to control and upgrade the service product?Control the essentials

The deployment and continuous management of service products are associated with some specific challenges, which need to be considered already at the development stage, especially since the process is iterative and launch is not a discrete point in time, as with physical products.The environment for implementing global service management in Scandinavian multinationals is much influenced by the firms’ cultural heritage. In general, they globalised their business using a highly decentralized governance model, leaving a large degree of freedom to local management. There is no reason to question this approach, as it was arguably one of the main reasons why Swedish multinationals managed to grow faster internationally than e.g. their American or Japanese competitors. In recent years,

considerable efforts have been made to harmonize also front-end activities, but still any initiative that can be seen as intrusion of the local decision making territory will not come easy. Against this backdrop, we can reflect on some fundamentals needed to control a business. First, you need transparency of the quantities sold and delivered, e.g. revenues, costs, hours spent, class participants or whatever the relevant unit is for a certain service. Secondly, you need a feedback loop to track the quality of what has been delivered. Finally, you need sufficient funds and mandate to continuously enforce the desired improvement of the offering, based on that feedback.Even if you sometimes hear physical product managers complain about deficiencies in all three of the above areas, their life is usually quite comfortable compared to that of a service manager. Product managers can easily define new products and allocate both revenues and costs to them in ERP-systems. From the warranty claims process, they get relevant feedback about the quality of products delivered. If they need to change or upgrade the product, there are funds available and they “only” need to put a request to the development department.None of these conditions are given for service products. For instance, obtaining reliable figures on the service volumes delivered often requires substantial manual work, especially if the service is not a profit unit in itself. Many ERP-systems are poorly designed for services, and the discipline in allocating the right revenues or costs to the right services is often limited.

Tracking the quality of services delivered is even harder. Customer satisfaction, of course, is the prime measure of service quality, but there are obvious practical limitations to continuous collection of such data on a global scale. Therefore, there is a need to monitor also the “technical” aspects of service quality, similar to those inspected before delivery of a physical product. Is the service performed according to the standards defined in the process? Are the deliverables

There is a need to monitor also the “technical” aspects of service quality, similar to those inspected before delivery of a physical product

presented to the customer in a professional way? If we believe that the developed service concept is based on the best available knowledge and practices, then adherence to the concept should be a reasonable proxy measure for customer satisfaction. Local differences in customer demand and preferences should be accounted for and built into the service products through modularization, etc. (just like you would with a physical product). Building these capabilities for global quality assurance of services requires active participation and buy-in from local units from the start.Upgrades and continuous improvements of a service product pose similar challenges for a service product manager. Most services are sold and delivered locally, leaving little room for a central unit to implement changes on its own. Besides the battle to receive investment funds at all, service managers would have to negotiate with all relevant front-end units to secure adoption of changes to a service concept. Since most of the “production capacity” resides in local units, any new or improved service will require some investments also by them. In this context, the service development manager should consider two important control aspects already in the development phase:

 Define early how to measure volumes, receive feedback and define improvements, to ensure explicit value adding deliverables from the development process.  Promote the service agenda. A substantial part of the development work is actually “internal sales” in preparation for deployment, and should be viewed as such. If you can help local units to see a business potential in services with their customers that may not be obvious in the daily work, and to understand the need for a unified global approach, you lay a good foundation for successful deployment of service products.

Longer term, service managers must find the right balance in the global governance model for services. A highly centralized model fits poorly with the very nature of qualified professional services. The other end of the governance spectrum, where any central function dealing with front-end activities is viewed only as a support unit, offering tools and templates to front-end units from which they can pick and choose at their own discretion, is equally mismatched with ambitions to provide consistent, world-class services globally. Scandinavian firms may be closer to the latter end today, but we do not prescribe any single right

model for the future. The balance between central and local must be configured for each company and situation.

Service development should be inspired by traditional product development – but be aware of the differences!

Jonas Strömgård and Bo Johannisson

XLeNt StrategyRegeringsgatan 67, Se-111 56 Stockholmtel: +46 8 519 510 00, Fax: +46 8 519 511 50e-post: info@xlent.se, www.xlent.se

XLeNt Strategy is a leading actor in the Nordic market for management consulting services, specialized in customer insight based strategy and business development. XLeNt Strategy has extensive industry experience from: telecom & media, banking & insurance, manufacturing, utilities, retail and transport.