Tomicide Solutions March 2007: Why Every Information Technology Businesses Should Be Based On Selling Integrated Professional Services and Not Only On Selling "Things"
By Tom "Bald Dog" Varjan
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Years ago throughout the world we could see products dominating the marketplace. Apart from lawyers, accountants and doctors nobody really offered professional services.
Then something happened and people started expecting more personalised services and solutions that became harder and harder to cram into pre-created cellophane-wrapped off-the-shelf product packages. So, the service era was born.
Let's take a quick look at what happened to one of the largest technology product vendors, IBM.
In the early 90's IBM was on its way to certain death. IBM's one and only product, the mainframe was about to die a rather miserable death. The current IBM management decided to split up the company into small divisions and allowing them to re-brand themselves individually.
Then, in 1993, enters the stage Louis V. Gerstner Jr. the former CEO of RJR Nabisco with a rather impressive track record in senior management with companies like American Express and McKinsey & Company.
However, some hard-core IBM-ers perceived a serious problem in Gerstner: He didn't know a dickybird about the IT industry and computers. Not a sausage.
In spite of massive resistance, Gerstner reversed IBM's "split-up" plan. Drawing on his past experience both at Nabisco and American Express, he realised that there was great need for a technology company that provides comprehensive system integration services. The wide-spread proliferation of the Internet and rapidly developing technology were only two factors to justify his decision.
In his book, Who Says Elephants Can't Dance?, Gerstner extensively talks about the repeated battles he had to fight with dyed-in-the-wool IBM-ers about these changes. But a final victory helped Gerstner to establish IBM the world's largest professional technology service firm, the world's largest system integrator.
After nine years at the helm of IBM, in 2002 Lou Gerstner retired as IBM's CEO. So, what happened during his reign? He started converting IBM, the vendor of "boxes", to IBM a top-notch professional services firm.
So, you can see IBM's biggest growth came from a service that had nothing to do with IBM's core business of selling mainframes. As a result of a mere afterthought, Gerstner added an extra $35 billion to IBM's bottom line by inventing "IBM Global Services". With this deed IBM became the largest professional service firm. As Business Week put it, IBM became the system integrator of choice.
And here is Gerstner's comment on offering services, "You are headed for commodity hell if you don't have services".
So, how come Gerstner recognised the opportunity long-time IBM-ers missed? One of the reasons may be that Gerstner was a former McKinsey & Co. strategy consultant, and clearly understood the value of services as a higher margin offer as opposed to peddling "boxes".
There was another obstacle Gerstner had to overcome. You see, IBM had provided services before Gerstner too, but the service was skewed by the lack of objectivity. The solution to every problem "happened to be" another IBM "box".
Gerstner made the top executives to sign a document in which they agreed to provide the "best" solutions to IBM's clients regardless of whether or not the solution is made by IBM. With this act Gerstner established objectivity, making IBM a reliable service provider.
The other example is Hewlett Packard, undoubtedly one of the finest engineering and manufacturing companies in the known universe. In 2000 HP made a bid of $18 billion to acquire Pricewaterhouse Coopers' consulting arm. Why would an already insanely innovative and obscenely successful manufacturing company would do that? As HP's top dogs put it, "We can't make in engineering any more. HP understood something many other technology companies failed to comprehend, that is, that good quality products are not enough. They are fine to enter the marketplace, but to make noticeable leaps companies need more. They need professional services.
And the examples are endless. Ericson, AT&T, GE, etc. All major manufacturing companies tend to outsource as much as possible, and focus on creating value-added professional services.
Also, forget about gradual improvement. With gradual improvement we would still be in our caves, which, due to gradual improvement, would have doors by now. Transportation has developed pretty significantly over the last 100 years, but not because scientist worked on breeding stronger horses and better carts. But because they invented new ways of moving from A to B.
In 1933 Walt Disney released the Three Little Piglets. It became an immense and instant success and the question became how to make the next animation even better. Some suggested to make a sequence to the Three Little Piglets. Walt responded, "You can't topple pigs with more pigs".
Similarly, Gerstner didn't bother to create better and faster mainframes. He created a brand new battlefield on which IBM had a bulldozering advantage to win all the battles and the war.
As time goes by, margins on products are becoming thinner and thinner. Product-based companies all over the world are tightening their belts. Just look at the typical product business, grocery stores. They operate on less than 1% net margin. Is it surprising that the overall quality of the service they provide is falling? Wal-Mart may be the cheapest retailer, but in order to keep their prices so low, they can only pay peanuts for their people, forcing Wal-Mart to hire their staff from among the lowest quality members of the unemployment lines. And then the company tries to make good margins by denying benefits from employees.
As the British say, "If you pay peanuts, you get only monkeys". And the proof is there. Both in Wal-Mart and many other places that try to compete on price. When I came to Canada in 1998, I ended up at Wal-Mart to buy some shirts. I was the fifth in the line. It took the cashier just over half and hour to "clear" the four customers in front of me. No, they didn't buy a lot and didn't have any complications. This is the capacity of a minimum-wage employee.
I believe, one of the reasons why companies shy away from providing services to augment their products is because they are scared of the extra work it would take to establish that service in their target markets' minds.
A few years ago I had some initial discussion with a computer retailer to help them "resuscitate" the company's IT consulting arm. There were about 2,300 small business clients in the company's database. According to the store manager, these clients would have been fairly easy to engage for consulting and preventive maintenance services.
So, why did management vote against this profitable opportunity? Because they felt happy with the wafer-thin margin made on the "boxes."
After ten years of fixing computers, the president of a small computer service company wanted to turn the company into an IT consulting firm. There was one problem though. The company was a "strategic partner", for several companies, thus the prevailing mantra was to "peddle" boxes.
The president even encouraged the technicians to do "half-repairs", so customers would have to call a technician within 2-3 weeks, so the company could push billable time without "wasting" money on marketing. This company was willing to forego the 50-80% margin consulting could have offered because its president was not prepared to give up the 5% margin the company made on selling hardware ".
In the meantime, the company is walking down the highway to entrepreneurial hell, as the late Bon Scott used to sing during it to us. Why? Because computer-fixing companies are dime a dozen, but most of them don't understand system design and IT consulting. In the construction industry they are called builders and architects. And builders don't do much architect work.
So, how can you achieve this change from being a purveyor of bulky boxes to provider of value-added professional services?
One option is gradual change, but I tell you here and now that by gradually changing you will achieve precisely dick. World War 2 was not won by gradually counselling and tolerantly sweet-talking Hitler into changing his intention about enslaving the world. No. World War 2 was won by sticking a few bombs right up his arse and blowing him and his thugs into some of the most pestilential pits of hell. The same way, if you want to change your company, you must be willing to blow up the old company, and build the new company on new foundations. Otherwise you are just patching up the symptoms, and while may achieve some short-term improvements, in the long-term nothing significant will happen.
Now put on rabbit farmer hat. Let's say you have a mother rabbit and she regularly deliver 10-12 baby bunnies. But you know that by the time the babies finish breastfeeding, the mother rabbit (your proverbial goose that lays the golden egg) will be a living wreck. You also know that there is a limited amount of milk for the babies. So, the re is no option but careful selection in a somewhat Spartan manner. You know you have to kills some babies if you want the best one and the mother to thrive. The quality of the cull will define the future of both the remaining babies and the mother.
If you want to have the largest and healthiest bunnies, you cull pretty hard. I used to cull down to 4-6 bunnies. you cull pretty hard. I used to cull down to 4-6 bunnies. Yes, it was borderline destruction but my objective with this "low-tolerance" approach was to have well-developed, strong and healthy bunnies. In doing so I helped the bunnies to optimise their development through plenty of breast milk without basically destroying the mother rabbit.
While this strategy gave me the highest yield, but in unlucky situations, due to illness, stray dogs, etc. the whole litter got wiped out because I didn't keep a safety net in my culling.
You may decide to be more lenient with your culling and leave more than 4-6 bunnies. You are more tolerant. You have a better chance of having more but only ho-hum mediocre rabbits. They grow more slowly and are more sensitive to diseases. And as it happens with rabbits, when one catches a disease, you can actually lose the whole farmful of rabbits. Rabbits are famous for breeding very very quickly, but they also spread diseases very very quickly. And as a farmer, the most you can do is to say, "Shhhhit!" Then go and burn the carcasses.
So, with more lenient culling you achieve gradual improvement among your rabbits, but utterly failed to produce great rabbits. Yes, you have lots of them, but they are pretty much the same what you're your neighbouring farmers produce. And when it comes to selling your rabbits on the market, you will be competing with every other rabbit farmer solely on price.
So, there are two problems with this tolerant culling method.
1) Less healthy bunnies have a better chance to survive. It means, higher level of toleration is easier to deal with, especially on an emotional level, but people who are not willing to change can "survive" and hinder your further progress.
2) You end up with the gradual restructuring of the litter, and the less healthy bunnies will leech the nutrients away from the best and most valuable ones. You end up with a "communist" litter. Everyone gets equal treatment. But you also end up with equally mediocre rabbits.
So, high tolerance gives you more security to have mediocre bunnies but wastes resources. Low tolerance takes more risk, but at the end of the day you are likely to have the best and more spectacular bunnies in the whole bloody universe.
Look at the best companies in history. They have been taking pretty high risks to get where they are. They have ended up there for a reason.
Now let's start with a misconception. Many people who look at the title will say, "We are not a service business. We are in retail or manufacturing but not in service. "
This is what Lou Gerstner, the former CEO of IBM (a former product company) said about selling products: "You are headed for commodity hell if you don't have services".
If you are selling TVs as a commodity, you are selling entertainment as a service.
If you are selling burglar alarms as a commodity, you are selling security and peace of mind.
Every single business should offer services.
Why don't they do it?
Because most technology product businesses haven't figured out yet what business they are really in. They erroneously believe that the business they are in is the same as the name of the product they sell. But just because you sell iPods, you're not necessarily in the iPod business. It's more like entertainment.
You have to think way beyond the products. I don't buy a cooker for the sake of having one. I buy it because it allows me to cook some great stuff, so I can enjoy the company of my friends, and some may even enjoy my cooking. (yes, I'm so optimistic)
The cooker and the food are just means to the end. When you sell something, you have to think of the end, not only the means. And this is where service comes in.
So, the cooker is a cooker on the surface but it allows you to regularly connect with your friends and enjoy their company over a homemade meal.
And this is the reason why every technology business should focus on services not products. Look at it this way. Every sane dentist sells toothbrushes, and all sorts of fiendish dentistry-related products. But they also know that you can't differentiate your business based on products. Only services can be truly differentiated.
Just look at junk food giant, McDonald's. What do they sell? Not burgers. They are selling the "I'm loving it" memory. That's all. Although in spite of the good marketing and the great service they offer, I still can't comprehend how people can love that horrible glob they dare to call fast food. But that's only me. Loving it. Hm. Even tolerating it.
Attribution: "This article was written by Tom "Bald Dog" Varjan who helps privately held information technology companies to develop high leverage client acquisition systems and business development teams in order to sell their products and services to premium clients at premium fees and prices. Visit Tom's website at http://www.varjan.com.
