Brief: “The Importance of Service-Based Revenues”

by Michael Franken, February 28, 2011

Economic Reality and CEO Expectations

In 2008, services drove 75% of US and developed country gross domestic product (GDP). This is up 50%
from the late 1950ʼs when services accounted for about half of GDP.1 At 2050, services value will stabilize
at 80%, due to factors like developing country spending, innovation, technology and market demand.
Meanwhile, since the late 1950ʻs, products in total dropped from 40% to 10% of total economic value.

Organizations constantly seek to grow revenue, profit, customer relationships, market influence and other
related measures of success. Based on input from 2,000 executives, Gartner found “increasing enterprise
growth” is the #1 CIOʼs priority for 2011. “Attracting and retaining new customers” follow.2

In IBMʼs 2010 survey of views from 2,000 CEOs, over 70% said they expected that customers desired
“new or different services” to a very large extent.3 20% more rated this ʻimportant to some extentʼ.

Today, firms across industries are focusing more on services - new ones or refining those in the market. They
rely on services to grow revenue, market share, customer satisfaction and -- in some cases, to
survive. The services are being sold individually, in services bundles or with products (as a solution).

Benefits from Services

Services can yield new revenue, often with regularly occurring income streams and attractive profit
margins. Services can help firms differentiate in the market, are tougher for rivals to copy vs. products
and help counter pressures from low-cost competitors.

Services can raise customer intimacy and loyalty. As cited in The Wall Street Journal, manufacturers rated
ʻimproved customer relationshipsʼ as the #1 benefit from transitioning to services sales.4 Other highly
rated benefits focused on better meeting customer needs plus gaining more share of their spending.

Challenges to Building a Service Business

Organizations often face obstacles to gaining profitable services income. Success with a services
business requires that the company obtain deep knowledge of how customers do their job. For
product sales, general knowledge of the industry and customer issues usually suffice.

Sales culture and incentives often need to change. Adding services to compensation structures with
long, deep product focus is hard, along with convincing buyers about services value. Sufficient skills are
required (at appropriate capacities, experience levels and often in the right geographic location). As well,
strong leadership, financial commitment and skilled personnel over time are key to sustain market-focused,
competitive and relevant services.

Information Technology As a Critical Enabler for Organization Results

Industry analysts see IT becoming more embedded in business processes. Technology organizations are
pressed to enable ʻexperimentation and innovationʼ for product design or testing, new business models and
customer experiences. Business leaders seek value from analytics and intelligence, with Information
volume is doubling each 18 months. Now, vendors broadly offer feature-rich, more affordable ways to
capture and analyze this data.
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Crescendo Management Consulting (mfrankennc@gmail.com)! (919) 426-7471!! ! ! Page 1

 Brief: “The Importance of Service-Based Revenues”
by Michael Franken, February 28, 2011

Private and public sector organizations place critical importance on responsive, high quality and reliable
IT support. But, realizing IT value becomes harder as business cycles shorten while technology and system
complexity escalate. Also, pressures continue for IT to deliver extreme agility for businesses -- while
driving down costs and risks. Rapid rates of change will further challenge traditional IT approaches.

In some cases, IT teams are delivering more value -- partly from shared services, improved IT processes,
and applications better aligned to the business. Cloud computing is receiving strong attention from vendors
and is high on CIO agendas. While it does not change the IT goals themselves, it can can accelerate
progress towards achieving them.

Closing
Economies around the world are now broadly recovering from ʻthe great recessionʼ. Pubic sector, private
and corporate investments are starting to flow more freely into ʻnew businessʼ initiatives -- with higher
emphasis on innovation, customer focus and flexible business processes.

Thoughtful strategic planning and operations of services-related businesses may well become engines for
competitive advantage -- bringing industry ʻwinnersʼ the associated financial and market-based success.

Notes:
1 “Service Science Progress and Directions”, Dr. James Spohrer, IBM, 12/8/10
2 “Re-imagining IT: The 2011 CIO Agenda”, Gartner, January 2011
3 “Capitalizing on Complexity: Insights from the 2010 Global Chief Executive Officer Study”, IBM, 2010

4 “Beyond Products”, Dr. Stephen Brown - Arizona State University, The Wall Street Journal, 6/22/09

About the Author

Michael Franken is Managing Consultant at Crescendo Management Consulting. The firm helps clients
define, create and operate services or solutions-focused businesses. Crescendo also performs market
research on emerging business and technology subjects. Its consultants mix strategic analysis, market
assessment and business model design with deep experience -- all focused on client success.

Beyond his work with Crescendo, Mr. Franken is a Visiting Lecturer at NC State University’s Jenkins Graduate
School of Management. Among other experience, for over 15 years he held leadership roles in consulting
and market intelligence at a top global technology solutions and services company.

Mr. Franken holds an MBA from Ross School of Business at The University of Michigan, plus a bachelor’s
degree, cum laude, from The University of Notre Dame. He resides in Raleigh, NC, and actively supports
several community services organizations, with special interests in music education for youth.

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