Professional Documents
Culture Documents
Acknowledgments
We would like to thank the companies who have shared their complex sales experiences
with us. Some are named in this report, many more are not.
Thank you also to the members of the Cranfield Key Account Management Best Practice
Research Club, whose support enables sales and KAM research at Cranfield.
Contents
Executive Summary
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Executive Summary
Business-to-business selling is changing. Steadily and seemingly inexorably, a
consistent trend is emerging. This trend is called servitization, which means
the growing tendency for suppliers to differentiate through services rather than
purely through products. This trend has emerged as it becomes more difficult to
differentiate solely on product. Cut-throat competition means that product
innovations are quickly replicated whilst, at the same time, low-cost
manufacturing locations compete on price.
To some extent this trend can also be seen in the consumer market. Consider,
for example, the Apple iPhone and iPad. Whilst both products have quickly
gained a large market share, Apple is constantly fighting legal battles to try to
protect its innovations. These battles are not always successful: for example, its
touch screen technology, is widely used by competing offerings. Meanwhile, its
market share is under assault from cheaper me too tablet computers. How
does Apple stay ahead? One way it can do so is continuous product innovation,
but this is expensive and can lead to customer confusion and resistance.
Another way it can compete - and this is a strategy that Apple has used
successfully - is to provide superior service. The Apple stores are designed to
feel friendly, to offer lots of hands on experience (rather than products locked
in glass display cases), and helpful advice (there are many assistants who are all
Apple enthusiasts; some stores offer get to know your iPad workshops).
In the business-to-business market, there are a number of striking examples of
organizations that are servitizing their offering and starting to offer
product/service bundles. Perhaps the best-known of these is Rolls-Royce, which
made a major conceptual shift a few years ago away from the notion of selling
aircraft engines and towards the idea that what its customers were buying was a
means of keeping aircraft in
the air. In response, RollsRoyce
produced
its
TotalCare offering, which
includes engine monitoring
and
maintenance
(service
elements) as well as the
engine
itself
(product
element).
(Photo courtesy of Rolls-Royce)
However, adding the service element makes the sale more complex; and
complex sales take longer to explain to customers, longer to negotiate, and
therefore longer to sell. This is even more so where the product/service bundle
is not pre-determined. Sometimes the product itself has to be customized in
some way (perhaps specific software has to be written, or particular features or
functionality added, or the packaging has to be adapted in some way to meet
the needs of that customer). Or the service element might need customization
in this case, the underlying product might be standard but the services that the
supplier provides are in some way tailored to a particular customer (perhaps
certain research or trials need to be carried out, or tailored training provided).
Sometimes, both the product and the service element require customization. In
that case, the sales process is likely to be even more demanding, requiring more
meetings with the client and also within the supplier company, all of which takes
time. This means that selling these complex packages is likely to be a much
higher-cost activity, compared with selling pure play products or services.
At the same time that suppliers are feeling this upward pressure on the cost of
selling, there is also a perceptible reluctance on the part of customers to pay for
the very customization that they increasingly demand. So, where previously it
was possible to bill customers for development time that the supplier could use
to customize their offering, customers are increasingly inclined to treat this as a
supplier cost, rather than as something they should pay. Customer expectations
are higher, and increasing competition may mean that the supplier feels obliged
to provide service or customization for free, in order to secure the deal. This
puts the business-to-business supplier into a margin squeeze, with downwards
pressure on prices and upwards pressure on costs, combined with the cash flow
issues associated with a longer and more expensive sales cycle.
These
developments expose the supplier to increased risk.
This pattern of longer and more complex and costly sales cycles has profound
and largely unrecognized - consequences for sales. It means that suppliers need
to be more strategic about their approach to sales opportunities and more
selective about which opportunities to pursue. Moreover, it means that suppliers
need to review their portfolio of sales opportunities regularly, to see which of
them still look like good opportunities. Then they need to make tough decisions
about which sales opportunities to walk away from, because the costs or the
risks are too high. Finally, the sales team needs to think about how it will craft
its offerings to customers, given that customization plays such an important
role.
In this paper we begin by considering the issues relating to complex sales; then
we propose a method that suppliers can use which considers every sales
opportunity as an investment and evaluates each opportunity against two
criteria: attractiveness (do we want this business?) and winnability (can we win
this business?). Finally, we demonstrate how companies planning to servitize or
offer innovative services can manage their sales opportunities as a portfolio.
The sales opportunity portfolio provides managers with a way of prioritizing
selling opportunities and of developing sales strategies.
2011 Xerox Corporation and Affiliated Computer Services Inc. All rights reserved.
A key driver for suppliers to servitize is the top line, to generate more revenues
from customers. Servitized deals are typically larger, since it is not just the core
product that is included but also a service stream. Moreover, the revenue from
the deal may continue over a period of months or years, rather than simply as a
lump sum.
The adoption of servitization may be conscious, driven by the perception that the
addition of services to a goods-based offer will facilitate the sale. By contrast,
however, some suppliers may inadvertently introduce servitization as they
bundle products and services to try to move away from selling rapidlycommoditizing products. In some sales, whether consciously or unintentionally
servitized, there is a process of collaborative co-creation between vendor and
customer. To date, researchers have tended to treat this collaborative cocreation as taking place post-sale although anecdotal evidence suggests that
there is considerable impact during the sales process, since the solution may
have to be developed or customized during the course of the sales process.
However, when it comes to the bottom line, there is evidence that firms are
struggling to profit from servitizing. One reason may be the higher costs of
delivering servitized solutions; firms that are inexperienced at providing services
may find them difficult to cost out, which in turn means that they might be
difficult to price. We have also seen that the cost of selling a complex offering is
likely to be higher and also is increasing, as customers put pressure on suppliers
to carry more of the initial costs of development and customization. But we also
know that at least part of the problem lies with sales. Increasingly, the sales
function takes responsibility for pricing and for managing delivery. So, the
blame for mispricing or for miscalculation of the costs of delivering an offered
solution often lie at the sales teams door. For most companies the problem is
compounded by the lack of reliable metrics on the cost of pursuing individual
opportunities.
Still worse, there is evidence that sales people in servitized firms give away
services as a way of selling the underlying product. This is a particular risk
where the sales person does not appreciate the true costs to the supplier firm of
providing the service he or she is selling. It is all too easy to throw in a service
offering such as a maintenance contract or some technical support, without
understanding that the implications could be long-lasting and the costs might
accrue for years to come. Traditionally, the responsibility of the sales person
ended at the point of sale. In the new world, the sales person is involved long
after the contract is signed, and has a far greater role in managing the ongoing
relationship.
Therefore, they need to develop an understanding of the
consequences of the sales offering; in other words, they need a sales strategy.
We begin with a definition of complex selling, and identify three implications:
higher cost of selling, longer sales cycles, and customization which may also
involve co-creation with customers.
Our central recommendation is that
servitizing companies practice sales opportunity selection.
We propose a
method for evaluating sales opportunities and a portfolio approach to the
development of sales strategies.
not necessarily exist in that specific format before the sales process and the
dialogue with the customer begins. Sometimes that dialogue results in the
customer having to alter their own business processes or the way they do
business in order to accommodate the new offering. These ideas (of offer
development during the sales process, of customization that often involves the
customer, and of adjustment by the customer) differentiate complex servitized
selling from other types of sale.
Therefore, we propose the following definition of complex selling in a servitizing
environment:
So, servitizing means that sales cost more to make, because of:
a greater number of meetings with the customer
higher supplier investment in the selling process
larger, more expensive, more complex offering
Involvement of more supplier people and different departments in the
sales process
For this reason, it is important to note that:
Suppliers adopting servitization experience an increase in their
sales costs compared to their costs of product selling
2.2 Case Study: Impact of Servitizing on the Cost of Selling Rolls-Royces TotalCare Concept
Rolls-Royce aero engines provides power systems and services for civil
aerospace, defense, marine and energy markets. The group is a global business
with customers in 135 countries.
Its aircraft engines are used by
more than 600 airlines worldwide.
A commercial air engine is an
expensive and complex product,
costing several million dollars and
containing some 10,000 parts.
Taking an engine out of service
for routine maintenance is hugely
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expensive, and unplanned maintenance due to engine problems is even more so.
Rolls-Royces TotalCare package effectively rents its engines to users, who
pay by the number of hours the engine is in flight. Meanwhile, Rolls-Royce can
collect and analyze data on 3,500 aircraft engines in use worldwide, allowing it
to predict potential failures, optimize engine maintenance schedules, and
improve future engine design.
Data are even collected in-flight, enabling
precautionary checks and advice.
The impact of removing unscheduled
maintenance events was seen recently
during a flight from Singapore to New York
when the flight was struck by lightning.
Rolls-Royces service team in Derby was
able to assess the condition of the planes
engines and advise the pilot that it was safe
to continue the flight, saving the airline
between $1m and $2m in disruption costs.
(Photos courtesy of Rolls-Royce)
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In effect, value is developed during the sales cycle through a dialogue between
the vendor and the customer and the consequent development of the solution.
So, servitizing means that sales take longer to make, because of:
Solution may be developed during the sales process
Conversations may need to involve multiple people and departments at
the customer
Supplier may develop and test offering as the sales process goes along
Contracts may be non-standard, or involve novel pricing methods
For this reason, it is important to note that:
Suppliers adopting servitization experience a lengthening in their
sales cycles compared to their product-selling sales cycles
2.4 Case Study: Servitization and Longer Sales Cycles the Case of
Rockwell Automation
US giant Rockwell Automation sells both products and services with an emphasis
on the uniqueness of its customized solutions (www.rockwellautomation.com).
A good example of its service innovation is RAAMP Rockwell Automation
Asset Management Portfolio. In this programme, initial discussions take place
between senior sales people and senior operations people at the customer. This
is followed by an analysis of customer needs relating to their overall
maintenance practice, including repairs and procurement; this audit, which can
take up to a month, is carried out by a specialist in the field of maintenance,
repairs and operations (MRO) who reports to the proposal manager for the
region. The output is a report/proposal that identifies how and where Rockwell
Automation could save money for the customer, for example through warranty
tracking, repair vs. new, in-service warranty, purchase order savings etc.
Delivery is carried out by an on-site asset management service professional that,
if the volume is big enough, Rockwell Automation provides for free or a reduced
fee.
The RAAMP program has been running
for over 5 years in Western Europe
and has been highly successful, with
more than 10 large clients in the UK
and Ireland alone.
The company
recognizes that this is a program that
adds value in specific environments
and is very diligent about the
customers it selects and to which it
commits savings.
Rockwell Automation
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However, as with the Rolls-Royce example earlier, the sales cycle is lengthy;
currently, from preliminary discussions to sign-up can take a year. In the early
days of the program, when customers were less familiar with it, it took even
longer.
This feature of initially longer sales cycles followed by some
contraction of the sales cycle as both sales teams and customers become
familiar with the concept is common to both Rockwell and Rolls-Royce.
Previous research has shown that shorter sales cycles are positively associated
with firm value; by extension, a longer sales cycle could mean, all other things
considered, a lower firm value. In the following section, we examine some of
the risks of servitization.
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As well as the investment (financial) risks, there are some business risks
associated with servitizing the sales offering. One risk is the opportunity cost of
spending so much time and effort on a risky and complex sale. Because
complex servitized sales typically result in bigger deals, they may look attractive
at the top line, but the chances of winning them might be lower than the
chances of winning a smaller, standard deal. The sales team leader needs to
consider which of his or her team should be engaged in complex servitized
selling and also whether the overall teams performance could be improved by
altering the emphasis between standard and complex sales.
Another risk is the risk of the unfaithful customer. In this scenario, a customer
pursues a customized sales process with a supplier, encouraging the supplier to
invest in innovative solutions by promising a large order at the end of the sales
process, but then the unfaithful customer deserts the supplier for a cheaper
provider once most or all of the development work has taken place. In effect,
the supplier has funded some innovation for the customer but not been
compensated for that effort.
Finally, there is a business risk for a supplier if it is offering to provide a new (to
the supplier) product or service, since the new offering may fail; this in turn may
cause both financial risk (the customer may need to be compensated and
alternative provision made) and reputation risk to the supplier (word may get
out within the industry that the supplier was associated with a failed project or
installation).
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15
These two criteria for evaluating sales opportunities desirability and winnability
- are similar to the essential criteria of risk and returns used in portfolio
management. However, the definitions that we will use here are wider than this.
As we will explore in the following sections, sales opportunity desirability has
both financial and relational aspects, which are in turn mitigated by some of the
risks of complex servitized selling that we have already discussed. Sales
opportunity winnability is a measure of the probability that the supplier can
successfully win the bid and can successfully implement it, given the importance
of the end-to-end relationship management already discussed.
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Financial Desirability (e.g. the net present value of the opportunity): this is
not the same as the lifetime value of the customer in which this opportunity lies,
since different sales opportunities within the same customer might have very
different desirability. Some sales opportunities are very big indeed, but may not
be very desirable.
Too often, sales people have committed the supplier
company to large but unprofitable deals, simply because they did not recognize
that the financials of that specific deal were unattractive.
The consequences for sales opportunity evaluation are clear. Each major sales
opportunity within a customer should be evaluated individually. It is not enough
to look at the overall profitability of
that customer and assume that every
opportunity in a profitable customer is
a profitable opportunity. This idea is
recognized by sophisticated suppliers,
who understand that they may not
want to pursue every sales opportunity
even within a good client.
We
can
look
at
the
financial
desirability of a sales opportunity
another way, which is to consider the
target share of spend.
In major
business-to-business
selling
relationships, it has become common
for suppliers to monitor the share of
their key customers spend that they
command, and therefore the percentage that is going to their competitors. The
share of spend metric (also known as share of wallet) is a useful indicator of
the true state of the relationship between the supplier and its customer. Some
suppliers scrutinize share of spend very closely, but they may not want 100% of
a customers spend on a particular product or service; instead, they bid only for
those sales opportunities that they can service profitably.
Technically, the financial desirability of a sales opportunity does not end with the
direct financial value of that one opportunity. Working with one customer on a
particular project or service offering might open the door to other, future
opportunities either with this client or with others. For this reason, suppliers
sometimes choose to carry out initial sales of an innovative offering at low or
zero margin because the ability to sell versions of the servitized offerings to
other customers in the future gives the supplier skin in the game, so it has
value. This kind of financial desirability, which is over and above the direct
financial value of that particular sales opportunity, can be measured using a
rather complex financial technique called a real option.
Relational Desirability: there are indirect financial benefits to a suppliers
customer relationships. These indirect financial benefits include innovation and
learning opportunities, reputation, referrals, and referenceability. Innovation
and learning benefits occur when a relationship with a customer leads to the
development of new products and services that can be sold to other customers;
or the relationship with a customer may result in the supplier learning about how
to improve its business processes and make its overall business stronger as a
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result. Reputation is the status that may come from association with a particular
customer or project. Referrals are where satisfied customers recommend a
particular supplier to others. This is also known as word of mouth and, in some
markets, is considered particularly important to the success of the supplier.
Referenceability is where the customer allows their name, logo or brand to be
linked with that of the supplier, which in turn enhances the suppliers brand.
Referencing might take the form of a customer name or logo on a suppliers
brochure, or it might be that the supplier can develop a case study about its
work with a particular customer that is extremely valuable to it in winning new
business.
Both referrals and references facilitate the acquisition of new
customers.
Risk: as discussed earlier in this report, certain kinds of risk carry potential
financial consequences which can reduce the desirability of a sales opportunity.
These risks include implementation risk and reputation risk. Implementation risk
is the risk that a solution developed for a customer goes wrong at the point of
installation. Not only can this trigger compensation payments and the need for
urgent rework (additional costs), it may also result in reputation damage and
consequent loss of business from this and other customers; so, implementation
risk may lead to reputation risk.
3.3 Sales Opportunity Winnability
There has been little research to date on the winnability of specific sales
opportunities. The research that has taken place is usually at the level of
supplier selection and from the point of view of the customer, rather than at the
level of individual sales opportunities that arise within a single customer over
time. What previous research on supplier selection has indicated is that there is
probably an emotional aspect to supplier selection, as well as a logical rational
approach to supplier evaluation. In other words, there are signs that buyers,
even in business-to-business markets, are influenced by other factors as well as
the purely rational. Unfortunately this customer-side view has not, to date,
been developed into approaches and strategies that can be used by sales people
to enhance the winnability of the opportunities they find within customers.
Nor is it clear who should have responsibility for evaluating the winnability of a
sales opportunity.
Salespeople are proverbially over-optimistic about their
chances of success, so the most objective view of winnability may lie in
marketing rather than in sales. In fact, improved opportunity selection may be
an important benefit from better integration of sales and marketing efforts. In
other words, marketing departments might have a role to play, not just in
providing marketing collateral that would help the sales team to increase their
chances of winning a sales opportunity, but also in helping the sales team to
deselect the sales opportunities that they should not be chasing. In many
organizations the sales team is still rewarded on top-line revenue or volumes
sold, rather than on bottom-line contribution or margin.
Measuring and
rewarding the sales team on the top line has the effect of encouraging them to
chase every opportunity that comes along, whether it is desirable or not. Topline rewards also make it difficult to persuade the sales team to work on sales
opportunities that take longer to win (such as large, complex sales of the type
that we are discussing here), and make it hard to dissuade the sales team from
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The lower part of Figure 3 deals with the winnability of the sales opportunity and
shows that this is driven by the (perceived) strength of the suppliers value
proposition and the readiness of the customer. The perceived strength of the
value proposition might be affected by its relative effectiveness but also by
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factors such as the technological fit with the customers existing business, and
its ease of use. Customer readiness might include recognition that the customer
wants or needs the solution, and might also be affected by the customers own
sourcing policy and by its previous experience with that suppler.
In summary, this means that:
1. The winnability of a servitized sales opportunity increases
with the relative perceived strength of the vendors value
proposition
2. The winnability of a servitized sales opportunity increases
with customer readiness
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5. Summary
In this paper, we argue that the trend towards servitization supplier companies
having to increase the service element they provide to their business-tobusiness customers - has profound consequences for selling which have been, to
date, largely unrecognized. Often, servitizing means that the opportunities to
gain efficiencies through standardization are limited. For this reason, it is
important that companies have a process that deals systematically with the
costs and risks associated with servitization. This paper notes a number of
implications for the practice of business-to-business selling. We argue that
servitization leads to longer and more costly sales cycles which, in turn, impact
on sales effectiveness. There is a link between higher sales costs and the
difficulties that vendors experience in profiting from servitization.
The
consequences for the role, skills and capabilities of the sales person lie outside
the scope of this paper but would certainly be a topic of additional interest.
We have argued that companies should regard servitized selling as a risky
activity; certainly, as a riskier activity than selling standard services or products.
We therefore propose that suppliers should consider this kind of selling as
though it was an investment with, frankly, an uncertain. We have shown that
every sales opportunity, whether with an existing or with a new customer, can
be evaluated based on its desirability and winnability and we have set out a
conceptual framework to demonstrate the relationships between these
constructs.
In section 4 we demonstrated how the desirability and winnability approach can
be used to develop a sales opportunity portfolio to support sales strategy.
Portfolio management is concerned with notions of risk and return in resource
investment and asset management. So far, these concepts have not been
applied in sales. Whilst our sales opportunity portfolio concept is informed by
customer portfolio approaches used in marketing, our approach differs in
focusing on the specific sales opportunity as the unit of analysis, and in
proposing a risk-adjusted financial value as the key metric to position the
opportunity within the portfolio. Research is now needed to examine the impact
of a portfolio-driven approach on managerial decision-making in the sales
context.
We have also discussed the use of sales opportunity selection as a managerial
tool to ensure that the supplier organization does not over-extend itself. It
follows that, if a supplier is servitizing, it should frequently re-evaluate its sales
opportunities during the sales process, so that it can understand the expected
monetary value of each opportunity and, where necessary, pull out of less
attractive opportunities.
This has consequences for the relationship between marketing and sales. Often,
marketing and sales work in a linear fashion, with marketing identifying
opportunities and then handing them over to sales (Kotler et al., 2006). In the
servitized world, supplier companies need a process in which marketing and
sales work together and take a more systematic and iterative approach to their
sales opportunities. In practice, it is likely that sales directors will need to
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Books
Ford, D., Gadde, L.E., Hakansson, H. and Snehota, I. (2003), Managing business
relationships, Wiley, Chichester.
Rackham, N. (1998), Spin Selling, McGraw-Hill, New York.
Rackham, N. and Ruff, R. (1991), The Management of Major Sales, Harper Business,
New York.
Rackham, N., Friedman, L., and Ruff, R. (1995), Getting Partnering Right: How Market
Leaders Are Creating Long-Term Competitive Advantage, McGraw-Hill, New York.
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Slywotzky, A. J. (1996), Value migration: How to think several moves ahead of the
competition, Harvard Business School Press, Boston.
Websites
CIA (2010), World Factbook, accessible at https://www.cia.gov/library/publications/theworld-factbook/index.html accessed 22 July 2011.
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