Innovating Your Service Business Model: The Capabilities to Succeed

One of the themes we have been exploring in the Cambridge Service Alliance is the question of how organisations best innovate their service business models. In some of our early work Ivanka Visnjic and I developed a framework of 12 capabilities that underpin successful service business model innovation. Since then we have been developing and iterating this framework, creating a maturity model that firms can used to assess the maturity of their capabilities for innovating their service business models. It seemed to me that it would a good idea to write a series of blogs on this framework and the twelve capabilities that underpin it - so here's the first one - explaining the framework.

In essence our research suggests there are four categories of capability that really matter when it comes to innovating the service business model. These are: (i) the ecosystem; (ii) the value proposition; (iii) the value delivery system and (iv) accountability spread. Let me explain these in turn.

The first set of capabilities are concerned with the ecosystem - increasingly competition is taking place at the level of the ecosystem, not the individual firm. In today's interconnected economy, what matters is the way the ecosystem is configured and how your firm is positioned to capture value from it. Apple and HP illustrate the point. If you ask the question - "of the $1,000 someone pays for an Apple or HP machine, who gets the money" - you find that Apple keep 60-70%, while HP keep only 30%. Why the difference? Because Apple use their own proprietary operating system (they don't cede money to Microsoft), they use their own chip (they don't cede money to Intel) and they have created their own distribution infrastructure (they don't cede money to the retailers).

So what can HP do? It is too late for them to develop their own operating system or get into chip manufacturing. Both technologies are too well established, with large incumbent players and high barriers to entry. The cost of establishing a retail infrastructure, certainly a high street retail infrastructure, is prohibitive. But what they can do is invest in Linux. If HP help Linux become a more dominant operating system then Linux reduces Microsoft's power in the marketplace and hence their ability to appropriate value, leaving more of the money on the table for HP. And in fact, it is in the interests of all of HP's traditional competitors to increase the power of Linux. So if HP collaborates with other laptop manufacturers, then collectively they can try to shape the ecosystem and their ability to capture value.

It is not just the ecosystem perspective that matters. The second theme that we saw in our research was the importance of innovating the value proposition - really understanding what the customer valued and the outcomes they were looking for. There's an old Theodore Levitt quote - "customers don't want quarter inch drills, they want quarter inch holes".  We don't think this is right. Customers don't even want quarter inch holes. When innovating your value proposition you have to understand why the customer wants the quarter inch hole. If it is to hang a picture, then how else might the picture be hung - you could glue it to the wall. You could invite an artist in to paint the picture on the wall. The key to innovating you value proposition is to understand deeply what your customers really value.

Beyond the value proposition, the third category of capabilities centred on the value delivery system. Here we are shifting into the question of how do we configure the resources and activities required to deliver the value proposition. What should we do? What should we ask others to do? Many of the services firms deliver today require networks of organisations to pool their capabilities. Understanding the right network structure and identifying the right partners is essential when innovating the service business model.

Finally, we shift to capabilities concerned with accountability spread. Here the idea is that by taking on responsibility for the outcomes your customers want - you increase your risk and exposure. By innovating the value delivery system - either through technology or partnering with others - you may decrease the control you have over the ecosystem. Hence you have increased your accountability, but potentially reduced your control - hence you may have increased your risk or accountability spread. Understanding the implications of this and how the risk will therefore be managed is paramount if the service business model is to be sustainable.

These four categories of capability - ecosystem, value proposition, value delivery system and accountability spread - form the highest level of our framework for understanding business model innovation. In future blogs I'll unpack each of these categories in turn and explain the capabilities that underpin them.

Struggling to make the shift to services? Write your own obituary!

It is clear that organisations across the globe are making the shift to solutions. Often the ultimate aspiration is providing the outcomes the customers (and in some some cases the customer's customers) want and need. Often this journey is described in terms of a service ladder - gradually moving from providing products to supporting the products with spares; through to remote or condition based monitoring; and finally onto contracting for capability or outcomes. While a logical flow and an inherently attractive proposition, successfully making this shift to solutions in reality is challenging. A critical issue is winning the hearts and minds of people who are used to a world of products. If you've always worked in a product or technology centred business then a commonly heard fear is "won't services cannibalise the product business" or put more directly "aren't we sowing the seeds of our own destruction - we'll kill the product business if we are too good at offering solutions".

Hearts and minds are always difficult to win, but one useful trick is to play on this fear. Recently we have been experimenting with asking organisation's to write their own obituary. The exam question we set is "write or record a short obituary for our services business. Imagine we are five years down the road and we haven't made our services business work (while all of our competitors have). What would the press be saying about us? What would they put our failure down to? Who would get the inheritance (e.g. which competitor gets our business and why)".

A simple trick, but the responses that are generated are both illuminating and in some cases humbling. Senior executives start to verbalise ideas like "ACME Inc has divested all of its remote and condition monitoring efforts and sold them to Monitoring-R-Us, a private company specialising in industrial solutions". Five themes consistently shine through these obituaries - the failure of the organisation concerned to keep pace with change; the inability to break away from the product-dominant culture; the need to get closer to customers and really understand their businesses; the reluctance to make the necessary investment - dabbling rather than committing to services and solutions; and missing the opportunity that the era of big data and sensors offers. In another blog I'll try to write more about these issues, but in the short-term if they strike a chord with you, join us in Cambridge on 1st October for the Cambridge Service Alliance conference - "Successfully Making the Shift to Solutions" - where we'll hear from organisations that are making the shift and overcoming the barriers. 

Performance Planning: Why Is It Always Left to Right?

Language and processes matter in the world of performance management. Yet far too often we take the status quo for granted. Take, for example, the phrase "performance management". Numerous organisations are seeking to improve their performance management processes, but are they really focusing on the right issues? Performance management smacks of managing past performance - taking corrective action to ensure we hit our targets. Sure, this is important, but how much effort are organisations putting into performance planning - planning future performance, rather than managing past performance?

Some would argue that shifting your focus from performance management to performance planning is a trivial change of language, but think about the behaviours performance management provokes in your organisation. Often people get very defensive when it comes to performance management. They see the aim of the game as demonstrating to their managers that they are on top of things. They have everything under control. There's nothing to worry about. Bad news can get swept under the carpet and fundamental issues can go unresolved for years.

Contrast this rather defensive behaviour with the idea of performance planning - planning for future performance. No longer is the focus on what has happened and why it has happened. Instead performance discussions focus on where we want to be and how we are going to get there. Sure we'll still need to talk about why we are where we are, so we can understand what to do differently in the future. but the performance conversations become more constructive - no longer are they defensive, reviewing past performance. Instead they focus on the future and where we want to go.

If you start down this route then some interesting issues open up. Many measurement system design methodologies (including ones we have developed) start from the classic vision-mission-objectives approach. The methodologies ask you to think about where you want to be, how you are going to get there and how you'll track your progress. These are all eminently sensible questions, but in essence they are left to right questions. Start with the vision, define the the objectives, specify the targets, elaborate your initiatives and execute. An alternative (or complementary) approach is to plan right to left, or at least to check the validity of your performance plans by working right to left. Right to left planning involves looking at the detail and asking yourself if we deliver all of these plans and initiatives what will they add up to? Will they deliver the results we want? Right to left planning is a great way of checking the validity of your left to right plans. Checking whether you'll achieve the performance you want to.

If you want to check the robust of your approach to performance planning, just ask yourself three simple questions: (i) do we have the balance right between performance management and performance planning - or are our systems tilted either towards reviewing past performance or planning future performance; (ii) do our performance systems provoke open and constructive debate or do they drive defensive and potentially destructive behaviour - have we got the balance right between accountability and creativity in our performance systems; and (iii) how well do we validate our plans once developed - do we do the right to left sense check to establish whether all of the individual projects and activities we are going to undertake will add up to the overall plan we are setting out to achieve? If you are not confident that your performance systems are working well against any of these criteria, maybe it's time to take another look at how you approach performance planning.

Andy Neely

The Great Myths of Measurement: Satisfaction is Dead

In the late 1990s Jeffrey Gitomer wrote a book entitled - "Customer Satisfaction is Worthless, Customer Loyalty is Priceless" - a title which neatly encapsulates the second myth of measurement, "loyalty is better than satisfaction". What Gitomer and countless others seem to miss is that "loyalty" cannot and should not "supersede" satisfaction.

The way to think about this is to consider the evolution of customer measures. Years ago we used to think that complaints were a good way of tracking customer satisfaction - simply count how many times people complain and then you'll know how good your products and services are. We now know that measuring the numbers of complaints is not a particularly effective measure of customer satisfaction. There are two reasons for this - first, in some organisations it is difficult even to get a complaint registered! Second, and more commonly, people don't complain directly to their organisation, they simply tell their friends about their bad customer service experiences.

So we move from customer complaints to customer satisfaction. Here firms decide to be more proactive and go out and ask their customers what they felt. Hence the plethora of surveys and phone polls asking for your opinion about service experiences. Xerox collected data in the late 1990s that showed highly satisfied customers were much more likely to repeat purchase than customers who were merely satisfied, so again the focus shifted - this time to "how do we get highly satisfied customers that will keep buying from us". The natural evolution was to customer loyalty - how do we measure the loyalty of our customers? Do they keep coming back and buying again - delivery repeat business? Do they help grow our business by recommending it to friends and colleagues (think how popular the net promoter score has become in recent years).

The final twist comes with the introduction of customer profitability as a measure. This was prompted by work which recognised that some customer were undesirable. Bain and Co released data suggesting that 140% of bank's profits come from 20% of their customers. The other 80% actual cost the bank money. So there was a sudden flurry of activity where people were trying to work out which customers were profitable and which were not. For the unprofitable customers the choice becomes - can we reduce the cost to serve (and make them profitable) or should we fire the customers and stop dealing with them.

These different perspectives on measurement complaints to satisfaction to loyalty and profitability are often seen as a natural progression, with more mature companies measuring loyalty and profitability. This is simply wrong. And it is wrong for a very simple reason. We have to different between what the customer wants of the organisation (great service, good prices, etc) and what the organisation wants of the customer (their loyalty, a decent return by working with them, etc). Customer loyalty and profitability don't supersede customer satisfaction - they look at the issue of customer measurement through a different lens. Customer loyalty and profitable are what the organisation wants. Great service and good value for money is what the customer wants. Our measurement systems have to track both, as both perspectives matter in successful organisations.

How Companies Learn Your Secrets

One of the most popular stories in last week’s New York Times was provocatively entitled – how companies learn your secrets. Drawing on material for a new book by author and journalist, Charles Duhigg, the article explores behavioural science and analytics in retailing. The highlight of the article is the story of a father who comes to a Target store complaining that Target is sending his high-school daughter vouchers for discounts on baby products. “Why are you sending my daughter these vouchers”, he screams. “Are you trying to encourage her to get pregnant”? A few days later the father calls the store manager to apologise – it turns out his teenage daughter is pregnant after all, she just hadn’t got round to telling her father yet!

How did Target get to know that the girl was pregnant before she’d even told her dad? Simple, through customer analytics – by looking at people’s shopping habits Target and many other retailers can make intimate predictions about people’s lives. Start buying lots of meals for one and the retailers will assume a relationship breakup. Stop buying eggs and the store might assume you’ve got your own chickens! Pregnancy is particularly important because it is such a major life change that it brings many other opportunities for the store. Most of us are creatures of habit. We buy the same toothpaste, soap and deodorant year after year – simply through habit. Research suggests that pregnancy is one of the best times to break old habits and form new ones. Target’s research suggests that an increase in sales of unscented lotions and vitamins is linked to pregnancy. Couple these two facts and the implications are profound. Target can predict who is and who is not pregnant, send those who are likely to be pregnant coupons and vouchers to use and try - in the process - to create new shopping habits for individual customers.

This brave new world, where big brother is watching, offers opportunities, but there are also significant risks for the organisations involved. Privacy concerns and reputational damage can be significant. Just look at the comments on the New York Times article – there are a lot people who are worried about the power of analytics and the potential for abuse of the data. Clearly organisations can see the benefits of analytics, but they also have to weight up the risks and put in place some very carefully considered governance mechanisms to avoid headlines like “how companies learn your secrets”.

Andy Neely and Ed Barrows

The Fallacy of Leading Indicators

In recent months we’ve noticed an increasing number of executives asking “how do I get leading indicators”? It seems that everyone is frustrated by the fact that lagging indicators only report history and what has happened. And in today’s turbulent environment – where past performance is only a weak indicator of future potential – historical data has become even less useful. Hence the search for the magic leading indicators…

The problem with this search is that it is a fool’s errand. There’s no such thing as a leading indicator. Let us illustrate the point. Often people claim that customer satisfaction is a leading indicator. If you satisfy customers today, they’ll come back tomorrow and buy again from you. And even if they don’t come back, if they are happy, they’ll tell their friends about your great product or service and encourage them to buy from you. So customer satisfaction is a leading indicator of future sales.

Let’s look at this from a different perspective – let’s think about the link between customer and employee satisfaction. Many executives would argue that happy employees lead to happy customers. If employees are happy, they work harder, deliver better service, look after the customers more – hence customers are happier. So employee satisfaction is a leading indicator – it indicates what future customer satisfaction might be. But then customer satisfaction is a lagging indicator – at least it is a lagging indicator with respect to employee satisfaction. And therein lies the rub – customer satisfaction is both a leading indicator (with regard to future sales) and a lagging indicator (with regard to employee satisfaction). How useful is a categorization framework that allows a single item – customer satisfaction – to be both a leading and a lagging indicator?

So what’s the answer? All the talk of leading and lagging indicators is meaningless, unless you consider the context. What really matters is the relationship between the measures – the performance model that shows how different dimensions of performance interact and impact one another. To ask the question – what leading indicators should I use is naïve. The question we have to ask is what performance model am I using to run this business? A good performance model illustrates the relationship between the different measures, allowing managers to understand how value is created through a network of interacting elements.

Andy Neely and Ed Barrows