Saturday 8 December 2012

The Great Myths of Measurement: Start with Strategy

Pick up any text or article on performance measurement and chances are you'll find the phrase "start with strategy". The underlying message being that you should align your performance measures to your organisations strategy. How else can you be sure you are executing your strategy?

This oft heard cry "start with strategy" is the first of the great myths of measurement. Organisations don't exist to execute strategies. They exist to create value. Value for their shareholders (or funders). Value for their customers. Value for the wider group of stakeholders with which they engage. If you don't create value for your staff, attracting and retaining talent is challenging. If you don't create value for your suppliers, getting great service from them is not straightforward. If you don't create value for the community in which you operate, retaining their support and goodwill is difficult.

The point is that organisations exist for a purpose and that purpose is to create value for stakeholders, so surely the first questions we should ask ourselves - when considering what to measure - are: (i) which stakeholders matter to us; (ii) what do they value; and (iii) how can we measure whether we are delivering value to them. Strategy comes later. If I am clear about what my stakeholders value then I can think about what strategies I am going to purse to create this value. So let's stop the inane calls to start with strategy and focus instead on what really matters.

Tuesday 4 December 2012

The Servitization of Manufacturing: Where Does Value Lie and When Is Value Realised?

One way of conceptualizing the servitization of manufacturing is to think about the two questions: (i) where does value lie, and (ii) when is value realised. In traditional manufacturing environments the value lies in products & parts – the physical assets – and value is realised at the point of sale – when the customer pays for the product. Many manufacturing businesses, particularly those with long life cycle products, have recognized that value can also be realized throughout the life of product, especially when products need repair and overhaul. Such firms have a strong focus on the aftermarket and capture significant value through the sales of spares and repairs.

An alternative perspective is to think about value lying in “solutions” rather than “products & parts”. This paradigm puts the emphasis on the outcomes the customer wants, rather than the physical product. The old Theodore Levhitt quote “customers don’t want quarter inch drills, they want quarter inch holes” illustrates the point. Many customers don’t want to own the physical products that many manufacturers provide, instead they just want the end result – or the outcome – that the product delivers. When manufacturing firms switch to an outcome focus they often contract for capability, guaranteeing uptime and/or availability of their equipment through life. Rolls-Royce, in its aero-engine business, now contracts for Power by Hour, selling the thrust the engines deliver rather than the engines themselves. A significant advantage of contracting for capability is that the incentives of the customers and the original equipment manufacturers are aligned. In an aftermarket focused model, it is actually in the original equipment manufacturers interest for their equipment to break down, as they realise value when they repair their products and provide spare parts. When contracting for capability or outcomes, however, the original equipment manufacturer only gets paid when their equipment is working, so it is in the original equipment manufacturer’s interest to maximize equipment reliability, something that customers also care about.

One of the challenges of contracting for capability is the issue of risk. If original equipment manufacturers take responsibility for the outcomes their products deliver, effectively guaranteeing results for their customers, they inevitably take on significant risk. The original equipment manufacturer is now responsible for delivering outcomes, not just the product. Some servitizing manufacturers have decided that the risk involved in outcome based contracting is too great and some customers have decided they are not willing to cede control over the outcomes, so they are unwilling to enter into contracting for capability. In such situations there is an alternative approach to offering services - selling knowledge and insight – recognizing that value lies in the solution the original equipment manufacturer offers. Think here of manufacturers that also offer design and development or installation advice. Think of those that have moved into training and consultancy services. They no longer simply sell products. They also sell knowledge and/or insight. Figure 1 brings these four perspectives on servitization together into a single representation, which illustrates the strategic choices manufacturers can consider when exploring how to servitize. These choices are not mutually exclusive. Manufacturers can decide both to be aftermarket and advisory focused, although clearly the different positions require different organizational capabilities.

Figure 1: Conceptualising the Servitization of Manufacturing

Saturday 13 October 2012

A Tale of Two Services

The irony of service encounters has been aptly illustrated in the Neely household today. This morning we received two separate letters in the post. The first from Customer Services at Lloyds Bank, the second from the energy company e.on

Lloyds have written to us because I phoned the call centre last week to ask why some funds had not been transferred to a cash ISA (savings account). During the call I asked about the interest rate we received on our savings only to be told - "oh, you are on a terrible rate. We changed the accounts about three years ago, but your account wasn't moved over. You would get a much better rate if you moved to the new account". I asked what I thought was an obvious and reasonable question - "why don't you move customers automatically or at least write to them and ask if they would like to have their account moved". The reply "oh, we publish interests in the press and in the bank. The best way of making sure you are on the right rate is to call the bank once a year and ask us whether you are on the best rate of interest". This call took about 45 minutes in total - for about 30 minutes I was only hold waiting for different people and Departments inside Cheltenham & Gloucester to answer question.

So the letter this morning was from Lloyds customer services telling me that while the bank welcomes "customer comments as it helps us put thing right for you", their "review shows no mistake was made". And that in the future I should "meet with the branch, call the helpline or view the website"... For Lloyds, and their subsidiary business Cheltenham & Gloucester, it is clear that the onus is on the customer - you check the rate, you see if it is the best one that is available, you contact us if you want to move to a different rate.

Compare the Lloyds approach with e.on, the second letter we received. The e.on letter was unprompted. It started by saying "we've looked at your energy account and can save you money". The letter went on to explain how e.on has reviewed the pattern of our energy usage and recommends that we shift to a different tariff, because by doing so we'll reduce our energy costs by around £90 a year. The letter from e.on is clear, precise, explains what to do next - who to call to get the tariff changed. Most importantly, e.on does not expect the customer to take responsibility for ensuring they are on the best tariff. The company recognises that they can help their customers by providing them with clear and unambiguous guidance. These two contrasting experiences have made me ask - who should take the responsibility for ensuring great customer service - the firm or the customer? Clearly both parties play a role and have some responsibilities, but where should the balance lie and how many organisations have got this balance right?

PS - as I type this I am on the phone to e.on to act on their advice, but I am in a queue... maybe in another blog the story will continue...

Friday 7 September 2012

The Challenges of Selling Services During a Global Recession

A global recession need not mean firms have to contract.  Instead, they might like to consider what we at the Cambridge Service Alliance call ‘the challenges of selling services’. We know that in a global recession there is more demand for firms to be innovative. People are asking themselves: ‘How do we deliver the outcomes we want?’ They are not just going to continue carrying on with business as usual.  What we advise firms to do is to ask the question: ‘What is the outcome the client is trying to achieve and how can we innovate the service delivery model to achieve that outcome?’

The shift to services is about the tendency of firms not just to sell products, but instead to sell outcomes - the outcomes that are related to services. For instance, a train manufacturer might in the past have sold trains, and then decided to provide the through life service to look after that train for its entirelife.  But today they are now going further.  They are saying that customers don’t even need to buy the train, as they will guarantee the availability of the train. They will maintain it and they will look after its upkeep, so that customers can just use the train. Ultimately customers often don’t want to own products, they want the service the product delivers for them.

There is little doubt that the shift to services does open up the market place; it creates new opportunities to grow revenue. But we do understand that it’s also not a straightforward change for firms - some of the changes are around changing mind-sets, and changing the culture inside the organisation, particularly for manufacturing firms. If you have been really good at making products and then you decide to move into servicing products as well, throughout their life, then clearly you are going to need people with different skill sets. You will need closer relationships with customers. You will have to help the organisation evolve and start to change the culture so that your firm becomes much more service oriented.

We have devised a seven-point scale of ‘challenges for sales’, leading in turn to seven ‘opportunities for sales’. These are: ‘appetite’, ‘outcomes’, ‘delivering what you sell’, ‘identifying and managing risk’, ‘sealing the deal’, ‘killing your business’ and ‘the hidden service’.

Appetite’ is about making sure your customers pull for your services, and that the demand is in the market, making it a pull rather than a push sale. In terms of ‘outcomes’, it is all about being really clear what it is the customer wants to buy.  It’s not the product – for example it’s not the drill or even the quarter inch hole, but it is about the ability to hang the picture.  It is also about building your capabilities, which is what Vestas has done with its business model. Vestas are no longer just selling wind turbines, instead they are now advising customers where to put them, utilising their knowledge of wind flows around the World, finding much more effective solutions for its customers.  This is how ‘delivering what you sell’ becomes essential.

You need to ‘manage the risk’ in the short and long term so that you really understand the dynamics of the risk.  What risk are you taking on, and so therefore how do you price the risk? You need to ‘seal the deal’ to avoid giving away the service and this means ensuring the customer really understands the value in the service. Then you have to ensure complementarity, so that you don’t ‘kill the business’, ensuring that both product and sales work together. Finally, ‘the hidden service’ is about putting the ‘sizzle’ in the service. Where are you going to draw a line of visibility and what are you going to make visible to your customers so they understand the value of your service? 

For instance, a restaurant like Benihana cooks the meal at the table, so that you see the chef tossing ingredients around, like a theatre show they make a real experience for you. We have to help customers understand what is going on behind the scenes, so they can see the value of the service they are buying. Another example is Rolls Royce, who take their customers into their controlcentres, and the customers see what they are buying when they sign the service contract. It allows customers to see what they are paying for and what the ‘sizzle’ behind the service is.

The thing that people find most difficult is to change the mind-set of an organisation.  You need to get your sales teams to recognise the value of the service, focus on the outcomes and then to make sure the customer actually understands the value of the service, and is therefore willing to pay an appropriate price for it. Customers also need to understand the risk transfer that is taking place and that this is priced into the deal – to appreciate the value of the entire package.

At the Cambridge Service Alliance we can try to help prevent mistakes being made in this shift to services, by turning those seven challenges into seven opportunities. We find that the issues firms face are often about complementarities. For example, if there are two separate business units, one for services, one for products and they just look after themselves then it’s not as good as if they can be encouraged to work together and make both of them ‘hum’. I want the product part to design for service, and I want the service part to go back to the product part of the business and give them new opportunities to sell additional products.

By making this shift to services product based firms can take advantage of theopportunities that present themselves even in a global downturn like today. In a difficult market there is an appetite for change, there is an appetite for saying - ‘We can’t carry on delivering things as we have done in the past’.  For instance, public policy makers may be scratching their heads and admitting: ‘We can’t deliver healthcare and education as we have done in the past, we can’t afford to’. There is a need for the service delivery model to change and that is where the innovation comes.

Listen to Podcast on "The Challenges of Selling Services" by Professor Andy Neely

Wednesday 13 June 2012

Beyond Co-Creation: Think About Co-Evolution

In the world of service many people talk about the co-creation of value - the idea that customers and providers work together to create value in service. Take, for example, a restaurant. As a patron you and your companions (assuming you are not eating alone) help create the experience. You engage in conversation. You banter with the waiters. You compare and often share your food. In a more complex business-to-business setting, the provider of the service is often dependent on customer inputs. When maintaining complex engineered equipment, for example, customer feedback - what's working, what's not - is an essential input to the maintenance diagnosis process.

I have spent the last couple of days at the launch meeting of the NEMODE - New Economic Models in the Digital Economy - network. One of the most interesting themes to emerge for me was the idea of the co-evolution of business models, rather than the co-creation of value. An apposite example is provided by eBay. When eBay was first launched it was created as a market place for selling cheap, second-hand goods. The idea was that you could go to your garage, find an old set of tools, put them on eBay - a form of electronic car boot sale - and sell them, rather than trash them.

Over the years eBay has evolved - it has become a virtual market place. People use it to sell everything - from second hand garage items to new cars. Some use eBay as virtual store, selling their goods online. What has happened over the years is the users of eBay have found ways of using the platform that were never originally envisaged. As the users have innovated their use of the platform, eBay has responded and innovated its business model.

Co-evolution doesn't rest there - it is not just the interaction of customers and providers. You also have to consider the broader eco-system. Take, for example, Apple. Through the Apps store and through Apps themselves, Apple have created a platform that allows others to offer services (Apps) to customers. The three parties involved - Apps developers, Apple and the customers - are jointly co-evolving the business model. This raises an interesting question - how good are you are co-evolving your business model with your customers? Have you created a platform that allows the customers to find new ways of creating value? And if so, are you capable of spotting these customer innovations and incorporating them into your business model to allow the next round of co-evolution?

Saturday 12 May 2012

Managing Performance in Turbulent Times: Analytics and Insight

Can management systems cope with the rapid pace of change in Society today? We believe they can but it does require new ways of looking at problems and putting in place systems that can adapt to those fast moving environments.

If you think about what has happened through political turbulence and also economic turbulence in recent years, and the rate at which technology is developing then you can see that the World is moving incredibly quickly. What we need to do is to have systems in place that are able to cope with and be updated rapidly to manage those changes. If we get the systems right and organisations adapt and change appropriately then profitability will increase and that can only be good for the recovering UK economy.

We began our research by thinking about what are the most turbulent environments which organisations are operating in, where are the really challenging environments? That led us to think of the rate at which some of the hi-tech firms are changing.

The question we wanted to ask is: ‘If it takes you a long time to design a measurement system normally, and if you think measurement systems are central to the way you manage organisations, how are these hi-tech firms that operate in very fast moving environments actually coping by deploying and developing their measurement systems?’ 

We know that it is not as easy to forecast what is going to happen in the future, and coupled with that most organisations these days are also creating vast amounts of data almost as a by-product of their existing operational processes. So there is more synergy between the new businesses like Facebook and Google and the traditional businesses than you might at first think. 

We found a number of practices that seemed to be in operation in those fast moving organisations but at the heart there were two cycles they used: a performance management cycle and an execution cycle.

It is important to look for the connection between the two cycles. We want managers to ask: ‘How do we know we are doing the right projects to drive performance in this business?’ ‘How do we make sure we are executing those projects quickly and how do we know when to step back and change the portfolio of projects and look for new things to do?’

What the PMTE (Performance Management for Turbulent Environments) framework does is that it gives you a method and a system to think about the way you are approaching performance management in your organisation. There is a lot more to making an organisation successful than simply getting a measurement system right, but it is an important element.

The key to successful working are the five enabling foundations that happened in all the organisations we looked at:

Strategic intelligence is about scanning externally for ideas and capturing that intelligence. Continuous conversations are about continually exploring and thinking about that information across the organisation.  If you get that right you get accelerated learning, where you actually start to learn faster about what is working and what is not working.

But you need a framework that gives organisational alignment to allow those continuous conversations and accelerated learning to take place across the organisation. However, you are not going to do that unless you have engaged leadership that actually legitimises it inside the organisation and allows people to use performance data to drive improved performance.  

We need to make sure performance measurement systems are as dynamic as possible in organisations and that they really help you to learn fast.

The faster you can get round that process then the faster you can learn and the more likely you are to survive in turbulent times. Robust systems are the key to today’s rapidly moving turbulent times. 

More on this can be found in this book by Andy Neely and Ed Barrows or here for a Podcast Interview with Andy Neely

Andy Neely and Ed Barrows

Saturday 24 March 2012

How good are your choice architects?

Service design seems to be getting more topical - especially the behavioural consequences of service design. Richard Thaler and Cass Sunstein wrote a fascinating book a few years ago called "Nudge". The core thesis of the book was that during design "choice architects" make design choices that "nudge" people in particular directions. Take a trivial example - handles on doors. When a door has a handle on it rather than a flat plat the subtle signal is pull to open the door. Ask yourself, how often do you walk up to a door with a handle on it and try to push it open? More controversially, nudges can be included in some ethically challenging decisions. In the UK we still have an opt in system for organ donation. People have to choose to donate their organs after death. Recent debates have focussed on whether we should have an opt out system - assuming that people will donate organs after death unless they have explicitly stated otherwise. This simple system design choice would have a profound impact on the levels of organ donations.

How many organisations actively think about the nudges they are introducing when designing services? How many organisations train their service designers as choice architects - encouraging them to think about the behavioural implications of seemingly trivial design choices? My guess is not many. Test it yourself. When you next experience a service, look for those nudges and see how many really nudge you in the right direction.

Andy Neely

Tuesday 28 February 2012

Innovation Festivals: A Source of Ideas

Last weekend was the global service jam - billed as 48 hours to change the world. Teams from 40 countries created 350 new service ideas across the course of a weekend - all themed on Hidden Treasure. Its an interesting concept - 48 hours to form - first a team (bear in mind participants have not necessarily met before and therefore can hardly be called a team at the start) - and second a new service idea. And the idea has to be documented and demonstrated. What a great way of engaging people in innovation.

I saw a linked piece in the UK's Guardian travel supplement recently. This time focusing on the innovation festivals that are sprouting up all over the world. Clearly the best known innovation event is TED (Technology, Entertainment and Design), but TED has sprouted a load of local TEDx events (independently organised TED events). I liked the Guardian article because it introduced a range of other innovation festivals, including Wisdom 2.0 in California, South by South West in Austin Texas, The Do lectures in Wales, 99% Conference in New York, Future Everything in Manchester, Likeminds in Devon, Vivid Sydney in Australia, North by North East in Toronto Canada and the unsubtly named World Domination Summit in Portland.

Its fascinating that social media, coupled with networking events are bringing people together simply to enjoy one another's company as they create new service ideas. Where does that leave service deign in organisations? If you have armies of volunteers offering their time and thoughts freely to one another, how do organisations compete with the collective wisdom of the crowd? In fact one could ask whether organisations should compete - maybe the time for open service innovation is upon us.

Andy Neely

Sunday 19 February 2012

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

Is Servitization for You?

There’s much talk of the servitization of manufacturing – supplementing products with services. The most recent data suggests that some 70% of economic activity lies in the service sector. Yet this figure ignores the significant proportion of service within the traditional manufacturing sector. Capital intense manufacturing firms, like BAE Systems and Rolls Royce, now generate over 50% of their revenues from service and support. Others, such as the oil majors have vertically integrated, offering downstream retail services, as well as upstream extraction operations. The shift to services seems inexorable and pervades many walks of life, but is it for you?

In answering this question there are some basic issues to consider. The first is quite simply are you selling a product that people want or need to own? Some products are consumed during use – think of food or fireworks. Your customer has to take ownership of these products, as they are used during the consumption process and have no resale value after they have been used. Other products are aspirational – products that customers don't need to own, but that they choose to own because of the value the product confers. We don’t need expensive cars to take us from A to B, or expensive watches to tell the time, but some people choose to spend their money on these luxury purchases because of the status ownership of the product confers.

Clearly there is scope to offer services associated with both consumed products and aspirational products. Restaurants are service and they use food as an input. Suppliers can offer to automatically restock restaurant supplies, an inventory management service, associated with food stocks. Some businesses choose to rent or lease aspirational products – luxury cars and even designer watches. In fact it is almost impossible to define a product that cannot be accompanied by a service. The question is where does the value lie. And can the service be delivered efficiently enough to generate a decent return.

For more detail on the shift to services see the Cambridge Service Alliance report – The Servitization of Manufacturing: Further Evidence

Andy Neely, Director Cambridge Service Alliance

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 na├»ve. 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.