BestServ Managing Service Business Winning best practices and success stories

Iiro Salkari, VTT Vesa Salminen, Lappeenranta University of Technology Juhani Pylkknen, T20

 Technology Industries of Finland All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Technology Industries of Finland. Publisher The Federation of Finnish Technology Industries Etelranta 10 00130 Helsinki tel. (09) 19 231 http://www.techind. Printed in Finland by Tammer-Paino Oy, Tampere, 2007 Layout: Mainostoimisto Sulake Oy ISBN 978-951-817-942-2

TABLE OF CONTENTS
ABSTRACT .........................................................................................................................................4 1 INTRODUCTION ............................................................................................................................5 2 SERVICE BUSINESS CHARACTERISTICS AND COMPETENCES.....................................................9 2.1 Product Business and Service Business Characteristics................................................................9 2.2 Industrial Service Business Competences ...................................................................................9 2.2.1 Service Business Model Key Competences ......................................................................10 2.2.2 Practical Example: Providing solution instead of individual equipment resulted in a long-term service partnership .....................................................................11 2.2.3 Practical Example: Maintenance Partner .........................................................................11 3 BUSINESS MODELS AND SERVICE BUSINESS MODELS ...........................................................13 3.1 Introduction to Business Models..............................................................................................13 3.2 Denition and Elements of a Generic Business Model .............................................................13 3.3 Elements of a Generic Service Business Model .........................................................................14 3.4 Services Offering .....................................................................................................................15 4 GENERIC MODELS FOR DIFFERENT TYPES OF SERVICES .........................................................19 4.1 Product Centric Business Product Servitisation ......................................................................19 4.2 Service Centric Business Service Productisation .....................................................................20 4.3 Change Management in Service Business ................................................................................21 4.4 Network Centric Service Business ............................................................................................23 5 SERVICE BUSINESS EXPANSION ................................................................................................25 5.1 International Service Concept Expansion .................................................................................25 5.1.1 Virtual Entry to the Russian Market (selected new market) .............................................25 5.1.2 Market Entry Prerequisites .............................................................................................26 5.1.3 Specic issues in the Russian Market ..............................................................................27 5.1.4 Road map for entry to the Russian market .....................................................................28 5.1.5 International service concept expansion road map .........................................................28 5.2 Licensing ................................................................................................................................29 5.3 Franchising .............................................................................................................................30 6 CONCLUSIONS ............................................................................................................................31 REFERENCES.....................................................................................................................................33

Abstract
Industrial service business is a fast-growing business area within engineering and manufacturing. In order to create new business, many companies have tried to develop industrial services but many of these have failed. Often, customers have not appreciated the service models proposed due to lack innovativeness (i.e. added value) in comparison with current co-operation models between suppliers and customers. This publication will summarise the ndings based on the BestServ Forum, a collaborative forum of 32 Finnish enterprises operating in the manufacturing industry. The objective of the forum is to benchmark best practises, establish current status, development needs and future challenges related to services business in the Finnish industry, non-exclusively focusing on the manufacturing industry. In addition to such industry-oriented objectives, the forum has identied topics for future research and development. This publication will report some of the ndings of this forum. It will also provide insight into potential research topics in the area of industrial services. This publication will approach the challenges from a business model viewpoint and also present a collection of case studies and best practices with regard to services business collected by the BestServ Round Table Groups. The case studies and best practices cover a variety of businesses implementing various types of business models. The authors have utilised the work of the BestServ Forum and the BestServ Round Tables carried out since the forum started its work. The text is further based on existing research and public case studies, which have been referred in the text.

Introduction

The business environment is inuenced by a variety of economic and dynamic trends, according to which companies have to consolidate on a global scale. At the same time, companies may be driven by technology and business innovations as well as by various deregulation and customer requirements. All these factors and trends add to the complexity of solutions development and make introduction of fast new products and services even more important and challenging. The engineering industry is currently undergoing a transition from having been a product provider to its new role as a provider of customer value and product-related value-added services. Enterprises have proclaimed and attempted to undergo this transition, but have actually failed in several respects. Some of the product-related services are partly implemented by way of technological solutions, but most of the industrial services are mere pilot schemes. The challenge is to identify critical customer processes and develop services to support these processes. This transition from ownership to access and potential sustainable business growth is based on creation and capture of these services. Business-related industrial services tend to grow out of a commodity trap. This transition can be referred to as framework of value transition. This framework covers the complete transition of the industry from component supplier to value provider (Figure 1). It points out the main elements which an enterprise or a value network of enterprises needs in order to become an integrated product/service provider.

Value Transition Process

Tangible Value Share Asset Management Product Sales Intangible Value Share Capability Management Value Operation

Overall responsibility by Customer

PRODUCTISATION
Overall responsibility by Provider

SERVITISATION
Figure 1. Value transition framework.

Figure 2 summarises a case study carried out by IBM. The gure illustrates the business transition from a product-oriented approach towards a service-oriented approach.

Figure 2. IBMs case describing their transition to become a servitised enterprise by Spohrer (2006).

In practice, this value transition means that traditional products are developing into solutions involving products as well as services. Typically, customers are unable to utilise such solutions without solution provider services. The transition from product to solution creates a basis for new business and new cooperation models between networked companies. As knowledge- intensive business and services offerings increase, the importance of capability is emphasised. Product business and products are very well documented, but in the services business and with services you should manage skills and competences hands-on without documentation. Most businesses face a serious need to develop their products and their service management in open system architecture (Salminen & Pillai, 2005). Business concepts are changing to take a knowledge-intensive and value-critical approach covering entire product lifecycles. Value networks of companies are responsible for solution offerings containing service and product elements provided by several enterprises. Offering structure management and further innovations requires a semantic structure. In recent years, feasibility studies have been carried out on the state of industrial services in the Finnish industry. The studies have been carried out by several research groups under a project called BestServ. According to these feasibility studies, a common understanding has been created about what industrial services are and how they interrelate with normal product business (Kalliokoski, Salminen, Andersson & Hemil, 2003). In terms of customer intimacy, manufacturing companies position themselves differently in terms of their industrial services offerings and operations. For practical reasons, at the beginning of their study, the BestServ Forum dened six different supplier positions or roles (Figure 3) in relation to customer intimacy: Material, component and module suppliers. Material, component and module suppliers focus on working as networked operative partners for specic machine components. Machine suppliers. Business relationships focus on delivering specic pieces of machinery or equipment meeting customers technical specications.

 Solution providers. Business is focused on system delivery, for example production lines usually designed for specic customer processes comprising a wider scope of supply than just individual pieces of equipment. Maintenance partners. Business focus expands to include ongoing supplier involvement during the entire lifecycle of the delivery. This role also adds contractual after-market elements, such as spares and consumables agreements, to the supplier-customer relationship. Performance partners. In this role, suppliers are closely involved in operating their customers technical processes by assuming partial responsibility for system performance, for example by way of availability warranties. This role requires suppliers to maintain at least a minimum of ongoing on-site presence. The focus of such customer relationships is to secure efcient operation of the units or production lines concerned. Value partners. Suppliers are directly involved in their customers business, for example through operate and maintain agreements, where customers pay a pre-determined price for the actual output of a system. Both parties focus on protable daily operations, and the suppliers are responsible for day-to-day operation of the plant or line concerned. Each of these six supplier business models has a mindset of its own. Progressing from one model to the next, suppliers will face tough challenges, mostly in terms of getting customers involved to develop their own technical and business competences in order to proceed. Strategic positioning decisions between suppliers and customers are important and need to be prepared as thoroughly as any other strategic decisions.

Network Competencies
Customer s business Customer s process Customer s operations Customer s resources Performance partner Process (Maintenance partner ) Solutions provider Machine and systems supplier Material, components and modules supplier Components and Configurations Operations Process Value partner

Customer intimacy and relationship management

Business

Figure 3. Business model analysis according to customer intimacy (modied from Kallikoski et al., 2003).

The rst three models are focused on supplier activities concerning customer investment decisions and do not concentrate too much on supporting customer process lifecycles. In their offerings, solution suppliers need an ability to understand and interpret their customers actual operations. Maintenance partners concentrate on professional maintenance management as ongoing processes. Performance partner suppliers may assume responsibility for the actual daily performance of their customers processes. Value partner suppliers are involved in their customers value generation, for example by producing optical cable in a cable factory and maintaining given quality and price levels in accordance with estimated market needs. Suppliers must have competence in their customers business. Knowledge and experience levels are increasing and create competence for productive communication between value network partners.

Figure 4. Four worlds of service jobs, upstream and downstream by Spohrer, IBM (2006). While there is much taxonomy of services and related jobs, you should be aware of which type of services you are involved in. Figure 4 highlights services for people, businesses, products and information. While services targeted at people and products are important, services targeted at business and information seem to be increasingly growing faster than others. This publication will concentrate specically on industrial business to business services. According to future trends, entire societies seem to be moving towards service business. Europe and USA are rapidly becoming service-minded societies. China is moving rapidly towards service deliveries. People in India are service-minded. So, strong market forces are inuencing fast business environment changes. On the other hand, in Japan people traditionally require services but knowledge workers are not too interested in providing the services themselves. They are already too accustomed to having services delivered for them. Different markets need different marketing strategies and more precise market segmentations.

Service Business Characteristics and Competences

2.1 Product Business and Service Business Characteristics

It is important to study and understand the characteristics of traditional products and service packages and related successful business concepts. Most industrial companies have had decades of traditional product business experience before entering into real services business. There are signicant differences between product business and services business. Traditionally produced product characteristics may be described as follows: Products have detailed specications Products are produced in well-planned and controlled processes Product uniformity is the target Customers are not involved in the production Internal quality control compares output to specications; improperly produced products can be recalled Production worker morale and skills are important The characteristics of services can be described as follows: Services have been described and illustrated Services are being implemented In services production, the target is uniqueness Customers are often involved in the implementation of the services Customers conduct quality control by comparing expectations to experience; if improperly performed, apologies and reparation are the only means of recourse Service provider morale and skills are critical The descriptions above are based good practices as presented by Erkki Peura of Nokia Networks in 2005.

2.2 Industrial Service Business Competences

Successful product and service business is based on company vision. Market, product and service strategies and respective road maps should be derived from the vision. Strategies and road maps seem to be more important with services than with products. In a traditional product business, shortages in strategies, road maps and customer input can be compensated in many ways, for example by following market trends and competitors. In a services business, direct customer contacts are most important and cannot be compensated by any other actions. The most critical competences of a successful services business as identied by the work groups organized by the BestServ Forum in 2005 are as follows: Knowledge of customer processes by way of handling entities Acquisition of new competences needed in a customized services business Ability to sell and produce services Network build-up in accordance with product and service packages Ability to integrate own key competences into related customer processes Competence management by way of development and knowledge transfer from the customer

Key account managers play an essential role in maintaining customer relations, continuously updating customer needs and ensuring correct customer business information and understanding.

2.2.1

Service Business Model Key Competences

Good service business management and performance need key competences, expertise and skills to be organised and made available for contracted tasks and responsibilities. The following denitions are used in this book: Competence means ability, power, authority, skills and knowledge to perform an agreed task. Expertise means certied expertise, knowledge and skills needed to support the performance of an agreed task. Skill means ability to do something related to an agreed task expertly and well. Key competences and expertises by level of industrial service business models will be briey discussed. Industrial service business levels are dened as follows: Material, components and module suppliers Machine and system suppliers Solution providers Maintenance partners Performance partners Value partners

Material, components and module suppliers feed materials, components and modules into processes of machine suppliers or directly into modules at system supplier erection sites. Key competences identied are as follows: Manufacturing skills in terms of cost efciency and quality Knowledge of customer manufacturing processes and product requirements Focused expertise related to material, component or module know-how, e.g. hydraulics Logistics and material handling management Short lead time management

Machine suppliers provide devices and systems meeting customer request and market demand. Customers specify their needs and suppliers try to full them by way of existing product modules and engineering. The key competences can be described as follows: Development of products and systems based on customer needs Development of service packages to support product sales Ability to apply advanced technologies economically Ability to manage market information, respond to market changes and follow business trends Order-delivery process and supply chain management Product and process cost management Systems installation and erection After sales services and spare parts

Solution providers provide total solutions to their customers problems by way of problem-solving expertise and customer collaboration. Focus is set on customer concerns and commitments to customers are relatively long-term. Solution providers work pro-actively and in close relationship with their customers. Offerings include devices, installation, eld service, upgrades and consultancy. Solution providers should manage system supplier competences, and also need to: Have knowledge of customer processes and collaborative business Manage projects and project business within a partnership network Manage eld service, upgrades and retrots as well as consultancy

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Maintenance partners provide availability by assuming responsibility over entire system lifecycles. Offerings include performance measurement and monitoring, eld service and data availability guarantees. Maintenance providers should manage system supplier and solution provider expertise in collaboration with the same and further have the following competences: Competence and technology transfer between customers and responsible providers Managing interfaces between customer and provider processes Access management to back ofce systems Management of HR resources in merger situations Management of collaboration contracts

Performance partners provide process efciency by taking over some functionally dened parts of customer operations. Partners will normally integrate their own systems and control into contracted performance units. Offerings include process availability and performance data, forecasts and decision support aids. Performance providers should manage system supplier and solution provider expertise in collaboration with the same as well as the competences of maintenance partners and further have: Data mining and supply abilities Knowledge of operative competitivity factors such as productivity, quality, on-time delivery and costs Process efciency development abilities Productive front end cooperation with key customers cannot be properly managed unless resources, competences, expertise and skills have been organised and made available on a level required to maintain good customer relations.

2.2.2

Practical Example: Providing solution instead of individual equipment resulted in a long-term service partnership

A customer wanted to buy a considerable number of wind sensors and other weather measurement equipment from Vaisala. The deal would be signicant but not exceptional. Still, it raised a question at Vaisala: why was the customer willing to make this investment, what did they really need? Based on these thoughts, Vaisala started discussions with the customer in order to nd out what equipment would really support the customers value creation in the best possible way. During these discussions it became evident that the customer needed to know and forecast exact wind conditions in a specic (and relatively limited) geographical area. They had a wind mill park under construction in this area and needed information about wind conditions in order to plan how to operate the wind mill park in the most efcient way. For instance, what should the blade angles be like, how many generators should they run. So, as it soon turned out, they did not need data from a single wind sensor, but needed to able to combine the data and turn it into a plan on how to operate the park and its individual wind mills. As a solution Vaisala offered a service to allow them together with their partners to provide what the customer really needed. Besides wind sensors, the solution required for example digital data collection and storage equipment. From a businesses viewpoint, the deal turned out to become a long-term business relationship instead of a one-off business relation. The customer proted in the form of reduced costs (as compared to doing all this alone and building the required skills and competences) and ability to focus on their core business, production and sales of electric energy.

2.2.3

Practical Example: Maintenance Partner

This example describes a full-service contract of a manufacturing facility. The service concept involves services provided to a customer including spare parts, preventive maintenance, xing breakdowns, inspections and training, repairs and refurbishment as well as comprehensive service. The contract also includes a bonus clause with regard to incentives for process performance improvement.

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Regarding key competences, expertises and skills needed for the full-service activities, the following issues have been carefully considered: Interfaces between customer and service provider processes have been dened and discussed. Communication, meeting and reporting rules have been agreed and discussed at a kick-off meeting together with the customer's personnel in charge. Competences needed have been dened and competence and technology transfers between customer and service provider have been agreed. Access to customers and service providers back ofce systems has been dened and agreed. System supplier and solution provider expertise with regard to production lines have been listed and collaboration plans agreed by way of separate contracts. Performance measuring and monitoring of the production lines have been put in place.

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Business Models and Service Business Models

3.1 Introduction to Business Models

In order to be able to dene generic business models, it is necessary to understand the limits of application of these generic models. Osterwalder (2005) has dened three business model levels: 1) denition of a business model and a meta-model dening the generic elements; 2) taxonomy of types and submeta-models; 3) instances and modelled instances. The levels dened by Osterwalder are depicted in Figure 5.

Business model concept

Definition: - What is a business model Meta-Model: - What elements belong into a business model Taxonomy of types: - Which business models resemble each other Sub-Meta-Models: - What are the common characteristics

Business model type

Business model type

Business model of a company Real world company

Business model of a company Real world company

Business model of a company Real world company

Instance Modelled instance Real world company

Figure 5. Levels of business models as dened by Osterwalder (2005). In this chapter, we will form a common basis to dene a concept business model and to establish its generic elements. We will also discuss services offering development. Subsequently, we will move on to the next chapter, where we will go more deeply into the taxonomy of types: we will identify two basic business model types and, based on the common characteristics of these business models, build a services business sub-meta model of elements. The different service business models will be illustrated by some cases and examples. We will also discuss change management related to extending offerings towards services.

3.2 Denition and Elements of a Generic Business Model

Osterwalder et al. (2005) dene business model as follows: A conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specic rm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the rm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate protable and sustainable revenue streams. According to a denition by Pulkkinen et al. (2005), business models link strategic and business process levels. Therefore business models cannot be unambiguously dened: Firstly, they are rather iterative towards strategy and secondly, towards business processes. There are the same and/or similar elements as in strategies and in business processes, but the content is more towards implementation than in the case of strategy and also more conceptual than in a business process. A conceptual denition of a business model by Pulkkinen et al. (2005) identies the following elements: value creation, value capture, 13

earnings (incl. pricing), business model development and organisational structure development. Osterwalder (2004) has dened the following elements of a business model (a meta-model): Value propositions: Company offerings bundling products and services into value for customers. Value propositions will create utility for the customers. Target customer segments: Which are the customer segments a company wants to offer value to? This is to describe groups of people with common characteristics, for which the company creates value. The process of dening customer segments is referred to as market segmentation. Distribution channels: What various means would a company implement in order to get in touch with its customers? This is to describe how a company would enter the market with reference to the company's marketing and distribution strategies. Customer relationships: What links would a company establish between itself and its different customer segments? The process of managing customer relationships is referred to as customer relationship management. Value congurations: Conguration of activities and resources. Core capabilities: The capabilities and competences necessary to implement the company's business model. Partner networks: Networks of cooperative agreements with other companies needed in order to offer and commercialise value efciently. This is to describe the company's range of business alliances. Cost structure: Monetary consequences of the means employed in the business model. Revenue model: To describe a variety of revenue ows materialising into revenues for a company. With many elements and meta-model denitions, the challenge is that they originate from product (technology) based business and, accordingly, underestimate some of the central services business elements based on the characteristics of services. The models may be based on transaction-based business, while long-term collaboration and process characteristics (instead of product characteristics) of the services are not in the very centre of these models. For example, analysing true customer value creation and customer participation in the services business and services delivery is underestimated. Similarly, the need for continuous development as a part of the services may not be included in the models, although this could be of great value to service customers. From a company point of view, the capabilities should focus on new services-related issues, for example training of service sales people, sales of services via sales channels, services delivery and development. Therefore, the application of existing models as a basis for services business must be done carefully and critically: some elements may actually need to be added when describing service business models.

3.3 Elements of a Generic Service Business Model

This chapter will introduce elements for describing a business model in which the characteristics of service business are emphasised, i.e., understanding customer business, understanding customer business environment and markets, and using competences needed in order to facilitate customer business. These are essential due to the company border-crossing process nature of the services.

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The elements of a service business model are:

Element classication Strategic business choices Element Position in company strategy Target customer segments Customer relationships Core competences, capacity and tools Partner network Description Positioning of the (service) business in the company strategy. Customer segments to whom a company wants to offer value and who can understand the value of the offering. Links a company establishes between itself and its different customer segments. Capabilities, competences and their capacity necessary to implement and develop the business model successfully during certain periods of time. Network of cooperative agreements with other companies necessary to efciently offer and commercialise value. This is to describe a companys range of business alliances. Describes the offering (service, service bundle, service and product bundle) providing value to customers. Understand customer value creation, address customer concerns in the customer segment. Describes how value is being created for customers. Describes the competitive advantages customers will get by utilising the business model based services. General requirements which must be met by any customer in order to benet from the services. Services provider and customer implementation. The logic of how to turn customer value into earnings for the services provider. Describes how a company delivers services to their markets.

Value proposition Customer Concern: Understanding and supporting customer value creation Customer value creation Value capture Customer advantages General customer prerequisites Implementation model Protable Service Business Earning logic Pricing Delivery Delivery channel

These elements are based on the generic business model mentioned above (by Osterwalder), but due to the challenges of many prevailing models identied, we have also included additional elements which are characteristic to services and service business. These additional elements are mainly based on work by RT3/2006 to provide a service concept denition framework. This service concept framework makes it is possible to describe a service in sufcient detail to be communicated to a customer (this was the starting point of the RT3 work). Although a service concept denition is not exactly the same as a business model for a service, it will tackle the question of value creation and value capture for a customer. Therefore it contains many elements that can be utilised to dene a framework for the purpose of describing a services business model.

3.4 Services Offering

Development of total offerings and services offerings as a part thereof is based on strategy work. During this work, the desired offering entity is dened and goals for developing the existing offering entity are set. As a prerequisite, the existing offering portfolio needs to be known. Accordingly, successful strategy work requires foresight related to market and technology development: how do markets and their needs change, what are the new technological enablers that may push market changes. When an understanding of these has been reached, it is possible to plan and steer product development of the services and products in order to develop the offering portfolio in the desired direction. In the case of services development, the pressure towards company strategy is more intensive than with products: services tend to challenge existing strategies, business models and market structures. As a

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result, we need to consider correct development portfolios comprising different kinds of services during the innovation process. Figure 6 provides an understanding of the principles of planning, steering and developing service offerings.

Figure 6. Planning, steering and developing (services) offerings.

Integrated product-service development

According to the good practices identied in the Round Table discussions of the BestServ Forum in 2005, service development processes have been quite well described and implemented. However, the industrial services part of the business, visions and strategies, as well as management grip could be more emphasized. To summarise the present situation with regard to integrated product and services development, an example of good practices has been illustrated in Figure 7. Ideal product and services development must be derived from company vision. Market, product and service strategies as well as respective road maps are derived from vision and customer focus. In services development, direct customer contacts are most important and cannot be compensated by any other action. In creating and fostering customer relations, the management grip is extremely important. The authority of a project leader should exceed the organisational borders of the company as far as project tasks are concerned. In the case of service and/or product development projects, the management will set objectives and metrics implement and perform follow-up decide about customers to be invited and build up customer relations ascertain that customer needs are dened sincerely, correctly and precisely enough be responsible for active communication throughout the organisation arrange a project launch kick-off meeting in order to discuss and approve objectives, persons in charge, roles and mode of action, milestones and gate criteria take care that resources are prioritised.

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The resources allocated to a services development project could represent various functions and organisations within the company. However, the most important competences should be considered. In the case of services development, these are: knowledge of customer processes by way of handling entities acquisition of new competences needed for customised service business ability to sell and produce services network build-up in accordance with product and service packages.

The Key Account Managers role is essential in terms of maintaining customer relations, updating customer needs and ensuring correct information and understanding of the customers business. Good customer relations and correct market information need to be continuously maintained. It is recommendable to maintain close and ongoing communication with selected key customers during the development project implementation of the service product concerned. Development and responsibility for service products and concepts could be centralised, but service performance should be customised and localised in order to meet customer requirements and other local conditions.

Product Creation Process

Define
QuickTime and a decompressor are needed to see this picture.

Plan

Design & implement

Design
Implement

Integrate Ramp -up & verify

QuickTime and a decompressor are needed to see this picture.

Maintain product

Ramp-down
Plan removal Ramp Ramp Sustain down down Support Prod. Del.

B2

E0

E1

E2

E3

E4

E5

E6

E7

E8

E9

E10

Service Capability Creation (SCC) Process

Plan Create service capability

Service Creation Process (SCP)

Define Plan Design Implement Verify Maintain
SCC Project activities Maintenance activities

Ramp-down
Plan removal Ramp Ramp Sustain Support down down (Glo) (Loc)

E0

E1

E2

E3

E4

E5

E6

E7

E8

E9

E10

Figure 7. An integrated product and service development concept (Rabbe Ringbom and Erkki Peura, Nokia Networks, 2005). When working to develop services offerings, partners, interest groups and services logics need to be taken into account: who does what, whose strategy is suitable, what model for producing the services should be selected, etc.? This is because services and services business are systemic within a company network and likewise towards customers. Figure 8 depicts principles applied for planning services-related roles, tasks and responsibilities. This matrix also forms a basis for understanding business logic and customer needs from a service point of view.

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Service By Customer

Service With Customer

Service For Customer

Dealer

Spare parts Preventive maintenance Breakdowns Inspections & Training Repairs & Refurbishment Comprehensive service Solutions Finanching & Rental
Figure 8. Designing a services business in a network comprising several service providers.

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Generic Models for Different Types of Services

In this chapter, we will dene some generic business models suitable for different types of businesses. In these descriptions, services viewpoints are emphasised even when the services are not the very core of the business. This is to facilitate understanding of role and position of services in the overall business in different cases. We approach to illustrate services containing business models at the two ends of the product-service continuum: Strongly product-centric models with some added services to support products Service-centric models, where products are irrelevant (in the background or non-existing) for the customer. The models we present are suitable for use in different cases and by denition, none of them is better than another. Looking at Figure 3, it is not a value as such to climb up towards the top right corner. Success of the different models would rather depend on the following factors: Maturity of offered products and related technologies: Has the product offered become a commodity already, is it being offered by a number of competitors with practically no or only very limited technological differences? Has the products technological development reached a maturity level which is very expensive / difcult to overcome? Has differentiation and protable growth based on technological solutions become a less viable alternative than differentiation by way of services? Markets: whether customers are ready for the services and certain of their own core business: Have customers dened their core business narrower than before in order to gain competitive edge? How well have customers dened their core business and competences? Are customers willing to buy the services and is this possible under current regulations? Can services be offered to (lead) customers to help customers potentially see the added value of these services to their key processes? Service providers must not be regarded as competitors. Can complex services be developed together with a key customer, who would contribute a customer viewpoint and later act as a reference? In addition to the two extremes, we also describe change management in creating services business. This would take place when offerings are extended towards services. Actually, real-life business models will seldom represent any end of a product-service continuum, but would be rather mixed models occurring somewhere in between the two ends.

4.1 Product Centric BusinessProduct Servitisation

This section takes a manufacturing industry company viewpoint. It is generic and will not cover all possible businesses. In product-centric business, manufacturing companies assume that use of their products will create value for customers. Subsequently, the assumption is that customers are willing to pay for getting the product and that earnings will materialise accordingly. Along with the product in question, there may be some services facilitating a manufacturers product-based business, which may not be considered interesting, protable or any business at all by this manufacturer. A manufacturer may consider such services a must for product sales (i.e., to their product-centric business). Such services would often typically be transaction-based and focused on problem solving: services targeting to solve an existing, bounded problem typically observed and even analysed by customers.

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Customers are willing to buy this type of services in order to keep their machines running at a high capacity, or because problem-solving or maintenance requires some special know-how. In such cases, customers may consider product-related operation and even maintenance to be their key competences. Customers may therefore consider manufacturer efforts to extend their offerings to include services a threat to their own business. Table 1 summarises the elements and typical generic descriptions of a product-centric business model. Table 1. Generic product-centric business model.
A generic model for product centric business Elements classication Strategic business choices Element Position in company strategy Offerings Target customer segments Customer relationships Core competences, capacity and tools Partner network Value proposition Description Companies are product houses, their main competitive edge is in technologically advanced products. Product-centric offering, possible services offered are to support this product-centric business. All services have been dened or conceptualised. Our products (and some supporting services) support customer value creation beyond product price. (Meaning that our products are purchased by customers whose value creation they support). Transaction-based business, related distant relations. Information exchange towards customers may be discrete. End customer relations may be owned by a distributor. Technological competences: we have a technology-leader product. Our manufacturing lines (and individual machines) limit our capacity. Subcontractor network delivering components for our products invisible to customers. Value comes from products and obligatory supporting services like spare part sales. (Typically there are also some favours delivered to keep customers satised favours are unsystematic services, which are not business) Our products produce something that is needed for our customers end product. Customer value comes from use/operation of our product and customers are aware of any use-related issues based on their experiences. Cost efciency is the key driver: the cheaper, the more competitive. Customers know how to effectively and efciently utilise our products support their own processes. Customers own competences to operate and maintain our products. Delivery of product to customers. There may be some favours or services to support the introduction of our product. Earnings are transaction-based and based on product deliveries to customers. Cost-based pricing (cost + margin), hypothesis: the value created by our product is higher than cost+margin. Local distributor network (wholesale) or own sales companies.

Customer concerns: Understanding and supporting customer value creation

Customer value creation Value capture

Customer advantages General customer prerequisites Implementation model Protable service business Delivery Earning logic Pricing Delivery channel

4.2 Service Centric Business Service Productisation

Service-centric business starts off with an understanding of customer value creation. Once the value creation processes are understood, the next step is to create an offering (consisting of services including products), designed to capture value. In this model, as customers consider the value for their business to come from services, they are ready to pay for these as well. Business relations are typically long-term and income is accrued over a longer period of time. The model includes more uncertainties, risks and related risk sharing than a product-centric model: over a long commitment time period, several cases of uncertainty may occur, for example issues related to the question what really needs to be delivered in order to full the value proposition. Table 2 summarises a generic description of a service-centric business model. 20

Table 2. Generic service-centric business model.

A generic model for product centric business Elements classication Strategic business choices Element Position in company strategy Offerings Description Companies are value partners supporting their customers (segments) value creation in order to provide solutions to meet customer needs, including subconscious needs. Consist of bundled services and products meeting customer needs and supporting customers value creation. Services are understood as processes to support customer value creation processes. We select customers (customer segments), where business may be supported by way of our services in order to be able to utilise our core competences to deliver services. Long-term relationships/partnerships, close relations with joint processes and dense and continuous exchange of information. Joint processes: service providers move closer to end customers in the value chain. Competences related to understanding customer business, processes and operations (at least to some extent), and information management within service networks. Competent personnel are required to deliver the services. The capacity may be limited in some geographical areas. May be strategic service partners and partners delivering services at some sites / locations. Partner networks often operate under the brand of the company acting as an integrator. Value comes from solutions supporting customer value creation. Such solutions consist of services and products. Customer value creation and related processes need to be understood. Customer value comes from solutions best supporting their value creation the services supplied may even add to the value of whatever the customer outcome is. Customers get solutions without spreading their resources beyond their core competences. Customer key competences and businesses are well understood by customers. Customers accept the services and commit to developing their own business at different levels (strategy, process, operations) in order to fully benet from the services. Purchasing know-what and know-how. Joint service conguration and implementation. Implementation involves different levels provided by service providers and customers. Setting right Key Performance Indicators (KPIs) is elementary. Earnings are accrued over time and are based on value created. Jointly dened KPIs pinpoint over- and underperformance for both parties (provider customer). There are agreed principles in place for dealing with performance-related risks. Value-based pricing: our services should deliver certain value exceeding servicerelated costs. Therefore, a righteously dividable value surplus will be generated. Own delivery set-up or use of service delivery networks, which can be organised in various ways to enable local offerings yet still protable business. Service delivery networks may not own customers.

Target customer segments Customer relationships Core competences, capacity and tools

Partner network

Value proposition

Customer concerns: Understanding and supporting customer value creation

Customer value creation Value capture Customer advantages General customer prerequisites

Implementation model Protable service business Earning logic

Pricing Delivery Delivery channel

4.3 Change Management in Service Business

The main question for a service business strategy is customer business evolution. This means that customer value changes should be captured by offering new service solutions. Different market trends (e.g. technology, market and community trends) are changing the business. Companies competing in the industrial services business market should track potential and value of the benets which customers may get from the services. Based on expected values, the main concept of service offerings should be designed to cover customer process life cycles. The BestServ framework (Figure 3) identies steps to 21

enable technology companies to develop their business from product-centric towards becoming servicecentric (value-centric). The framework is based on the idea that such extension would take place by way of providing different types of lifecycle services for the products and to customers, and these services would help technology companies to implement service-centric models, as illustrated in the top right corner of the framework in Figure 3. Example: a maintenance partner is offering maintenance lifecycle services to support their own products and applications or their installed product base. The basic idea is to provide higher product availability by way of reducing time or supporting applications by way of proactive maintenance. Proactive maintenance is enabled by way of knowledge of products and applications. Maintenance costs can often also be reduced as compared to customers in-house maintenance functions. On the other hand, a performance partner is offering process efciency by way of taking care of some parts of their customers technical processes and ensuring high performance for this part. Value creation takes place in collaboration with customers and dense information exchange and joint processes are needed. Along with technical process availability on certain performance levels, offerings include performance data, forecasts and decision support aids. Looking at the BestServ framework (Figure 3) on a more sophisticated level, the services provided have a continuous positive inuence on customer process performance. For instance, value partnerships and performance partnerships represent such more sophisticated levels and service- centric business. On such service-centric levels, service providers are not only responsible for operative issues, but they would also be involved in their customers innovation and development activities. For example, a value partner might be responsible for the operation of some production machinery or system and thereto related customer process development activities. In an extreme services example, the service would be to provide the desired outcome and the customer might not even know what machinery or systems are used to produce the outcome, nor where the outcome is being produced. A well understood and structured business model supporting the business architecture is a very important strategic tool when business is evolving according to market requirements. Lifecycle innovation needs new approaches and leads to business-concept management. In future, it will be possible and essential to sell business models based on the available architectural structure of a company. Knowledge-intensive business is undergoing continuous evolution. Lifecycle challenges may be faced and competitive advantage achieved in knowledge communities (Tammela & Salminen, 2006). Increasing parts of innovation processes are taking place outside individual companies. On a global scale, information is available anywhere where an internet connection is available. Communities share the same information at the same time. The question is how to integrate and synchronise knowledge, technology, competences and processes, especially when creating something new in networked lifecycle business.

Case Study: KONE Service Business

KONE was among the rst Finnish machine suppliers to proceed from key supplier to service partner. Today KONE serves clients looking for the best long-term ownership value for their property as well as clients targeting for lower total costs. KONEs maintenance service covers their own products as well as products made by other manufacturers. KONE offers new comprehensive service concepts to support value partnerships. The KONE Care for Life concept ensures safety of use, trustworthiness and usability during the entire lifespan of a device. KONE Care of Life tools help dene safety risks of devices, usability problems, ageing technology and quality levels of appearance. Based on denitions, clients and KONE will jointly prepare the plans for service and modernisation of the devices in accordance with client repair time schedules. The KONE Care for Life concept can be utilised regardless of manufacturer of device. KONE offers real-time services to customers looking for performance excellence by utilising technologies such as remote control or eld terminal devices for their service personnel. KONE service centres are available and at their customers service 24 hours a day. With the help of technology, service quality 22

and speed can be improved, and on the other hand the same technology can be utilised to improve the productivity of the service. Figure 9 illustrates lifecycle thinking at Kone Elevators.

Figure 9. Kone applications life cycle care at customer site.

4.4 Network Centric Service Business

The cost pressure of global competition serves to accelerate networking within industrial services. A transition from product-centric business towards industrial services is in progress. When proceeding towards services, the aim is to provide increasing value into the customer lifecycle process. This will create new business opportunities. Enriched offerings are usually achieved by providing particular knowledge to other companies along the supply chain in order to increase the value of customer processes or products. As a result, companies are moving closer to or even into the operation of their customers, which requires different organisational approach and networked thinking. A network in this sense consists of individuals and organisations with their available resources, which are taking part in a process and interacting accordingly. This network perspective should be implemented in the service development phase already. Competition takes place not only between individual enterprises but also between networks of businesses. In 2006, the Service Excellence roundtable recognised that the partners of a value network assume joint responsibility for nal customer process performance and its continuous development. Networked business also means new ways for earnings logic. According to Salminen and Pillai (2005), value and benet of lifecycle customer processes have to be developed in collaboration with service partners. This benet should also be presented to customers. Along with further development of business ecosystems and increased requirement levels, some partners in the network will face the trend to produce industrial services consisting of service and dynamically interlinked products only. Within networked industrial services delivery there is a trend towards increased knowledge intensiveness. There is a need to produce services and provide information and knowledge handling and management. The critical success factor will be the capability to nd and handle information and knowledge in a changing environment to support in-house and customer lifecycle processes.

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Successful networked business requires jointly agreed rules between networked businesses, collaboration management, deep information technology integration as well as fast and easy partnership creation skills. Increased knowledge intensiveness will simultaneously increase the intimacy between the partners of a value network. There are already enterprises working to help companies understand the relation between life cycle costs, system reliability and availability promise. Lifecycle considerations are gaining importance as customer intimacy is increasing in collaborative relationship.

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Service Business Expansion

Many issues need to be considered and prepared prior to launch of service business expansion. Firstly, one needs to create a functional strategy based on relevant market information. Decisions to launch expansion should be taken with full management commitment. Further, in terms of success, it is important to recognise and prioritise certain target customers and geographical areas, particularly in case of large markets. In addition to above, service concepts and related delivery processes as well as service performance competences and cultural aspects should be well in place. With regard to these prerequisites, this chapter will discuss the following strategies commonly used for service business expansion, penetration to new markets and growth: International service concept expansion Licensing Franchising business models in services

5.1. International Service Concept Expansion

International service concept expansion based on best practices and a practical virtual entry into the Russian market are discussed here. The topic was processed by the Round Table of BestServ Forum in 2006. Special attention was paid to service concepts, international expansion roadmaps, expansion in the Russian market and dedicated success factors to be observed in this specic market. Due to the fact that development functions have been better and more efciently organised for the part of products than for services in traditional product business-oriented companies, the integration topic was considered mainly from a services point of view. Finally, an ideal road map for international expansion on service concepts for the Russian market was created by the participants. The road map could be applied for any other new market entry.

5.1.1

Virtual Entry to the Russian Market (selected new market)

The Russian market was selected to represent a new market in this virtual market entry exercise. The service concept considered in the exercise has been illustrated in Figure 10 in the form of a matrix split. The concept selected is a practical industrial case dealing with real service needs, offerings and service providers. Export of machinery is in place and this business is growing in the market looked upon here.

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Service By Customer

Service With Customer

Service For Customer

Dealer

Spare parts Preventive maintenance Breakdowns Inspections & Training Repairs & Refurbishment Comprehensive service Solutions Finanching & Rental

X X

X X X X X X X X

X X X X X (x)

X X

X X X

Figure 10. Description of an industrial service concept

5.1.2

Market Entry Prerequisites

As discussed, there are many issues to be considered and prepared prior to taking a decision to entry any new market. A sufciently functional strategy based on relevant market information should be created, and the decision to expand should be taken with full management commitment. In terms of success, it is important to recognise and prioritise certain target customers and geographical areas, particularly in large markets. The rst service offering should be dened based on current needs and situations of the prioritised customers. For a smooth start-up, a training concept and modules should be available according to a dened offering. In addition, sufcient language and cultural skills are required. Detailed actions planned for the expansion should be carefully communicated, fully understood and agreed among all contributors. Management commitment should be requested for all actions. It is recommendable to apply Demings Plan-Do-Check-Act Circle in the implementation of actions in order to assure proper completion of the entry. Opening a branch ofce involves the following preparations: Proper premises should be available and contracted. Minimum personnel should be available and properly trained. Necessary tools and tooling should be arranged and properly located. Logistics management in the target country should be well in place. Order placement, contract, delivery and invoicing processes should be functional. IT and ICT infrastructures should be implemented and veried. Administration and business control procedures should be in place.

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5.1.3

Specic issues in the Russian Market

The following key issues specic to the Russian market have been collected here according to Tapio Riihinens presentation on April 28, 2006. Tapio Riihinens remarks Russian markets and business environment are changing quickly should also be considered. In a stereotyped Russian company culture, the top management knows and decides everything. Employee growth potential and independent thinking is completely neglected. Western companies can quickly establish strong and long-term commitment and motivation observing the following rules. A common understanding on strategy and on how we will jointly manage its implementation will enhance employee commitment and efciency in all operations. This also includes structural understanding. This is why a concrete easy-to-communicate strategy and a measurable strategy implementation plan are the rst steps to build up sustainable success in Russia. An efcient and exible (lean) management system documented into an Operation Manual is a most critical matter in the complex Russian bureaucracy. The management system will be built up on a exible western format to comply with local law, and constantly questioning the not possible statements from the statutory accountants. In the case of take-overs involving Soviet-era units, the best way to start is to destroy all existing nancial and administrative procedures and start from scratch. Inclusive incentive schemes to cover the entire organisation will be an essential part of the management system when building up a clear and inspiring motivation system. Establishing a strong aligned company culture plays an essential role for successful industrial expansion in Russia. The best parts of the companys own culture and values must be imported to Russia. However, the dynamics of the Russian market sets special requirements. Winning cultures are always characterised as follows Competitiveness in all actions Speed and agility fast reaction and decision-making Being constantly alert Finnish or Western cultures cannot cope with all these requirements. This is why these elements must be enhanced by the local management. This must be considered particularly when recruiting a local general manager.

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5.1.4

Road map for entry to the Russian market

A penetration road map to the Russian market is presented in Figure 11. The road map was created by summarising the results of the virtual new market entry exercise completed at the Round Table Meeting of the BestServ Forum on April 28, 2006.

Figure 11. Penetration road map to the Russian market (Best Serv 2006, Round Table 5). To summarise the meeting conclusions, one needs to carefully consider the following factors of successful market entry into Russia: Basic knowledge of Russian language Understanding of Russian and Slavic mentality Adapted concept for the Russian market Well done studies Courage to jump into a new culture Trust people, but check from time to time Forget Soviet era players

5.1.5

International service concept expansion road map

The road map for entry to the Russian market could be applied for any new market penetration. An industrial service concept and a proper offering should be in place and all prerequisites considered and decided prior to taking the rst market entry actions. Market-specic issues cannot be avoided in any new markets. Figure 12 presents the key phases of a new market penetration. The rst phase describes a general split into after-sales and services business after expansion of the service concept. The second phase illustrates the situation after consultancy services have been promoted. This creates substantial increase of performance contracted business. The Delight part of the service business with or without pricing and charges is crucial to customer satisfaction and growth. Enlarged offering of sophisticated service concepts together with customer relations build-up has a signicant impact on growth and third phase splits. Finally, prot is generated by way of optimal ratio of repairs and solutions and performance contracts. 28

Figure 12. Development phases of an ideal market penetration showing business structure and main emphasis by phases. Export of traditional products to the market had been successfully started prior to entering the rst phase.

5.2 Licensing
Licensing of industrial property includes a signicant amount of various services depending on the dened content to be licensed. Licensing an entire protable business including products, processes, business models and brands gives a huge business opportunity with reasonable low capital deployment. However, licensing of an entire business requires precise denitions and documentation of product data and functions, manufacturing processes and tools including IT, supplier network as well as related training material, modules and resources. Further, description of business models and brand features and marketing materials packages add signicant value to the license offered. Licensing could be more protable business than product sales but less protable than services. Of course, prots will depend on the quality of licensing services, brand image and documentation.

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Minimum Price Right Price

Cost Efficiency Quality and Service Entire Concept Firm Brand Service Packages

Revenue

Margin
Product and After Sales Licensing Service Business Figure 13. Product, licensing and service business protability. Services and concept licensing business provides high protable opportunities depending on customer value and quality of the licensed package. Entire business concept licensing is good practice for penetration to new selected markets and for brand image enhancement. Capital deployed in penetration could be signicantly reduced for the licensing procedure compared to investments required to obtain the same capacity. Service packages could also be licensed and this could be equally protable as product-related licensing. However, reduction of capital deployed is a minor issue for this type of penetration action. Licensing service packages only could be protable on a cost-related basis but actually create very little absolute money. The fact that service business requires close customer relations and continuous relation management makes licensing of services more complicated than licensing of products and processes. Further, precise documentation of service packages is a difcult task due to continuously changing business environments.

5.3 Franchising
Franchising is a model where trademarks and proved methods for doing business are provided to another company for business purposes. The company providing these rights is called a franchisor and a company utilising these is called a franchisee. In addition to methods and trademarks, a franchise agreement will often include training, quality standards and guidelines. Compliance with these is controlled as one precondition for conducting franchise business. The franchisee pays a fee for using the franchise agreement. Typically the fee is equal to an agreed percentage of the gross sales or prots, or it may be an annual fee. Especially in b-to-c service business, there are many franchising examples; express food chains, specialty stores and similar. In industrial contexts there are also some service-centric franchise businesses, for example in the cleaning business.

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Conclusions

Ideally, services business requires the following matters to be emphasised:

1. Management grip and targets

In industrial services business, development ideally arises from company vision. Market, product and service strategies and respective roadmaps are derived from the vision. Strategies and roadmaps seem to be more important with services than with products. When developing a product business, shortages in strategies, roadmaps and customer inputs can be compensated in many ways, for example by following market trends and competitors. When moving towards industrial services business development, direct customer contacts are most important and cannot be compensated by any other action.

2. Business models and offering portfolios

Good business models outline strategic business choices, customer value propositions, earnings logic and pricing including sales and delivery. In order to achieve excellent performance with regard to customer relations and implementation, offering portfolios should be in line with business models. All elements of services business and offering should be described and modelled in a customised way according to business segments.

3. Resources and competences

The nature of industrial services business calls for dynamic hands-on capabilities, including optimal mixture of leadership, customer relations management and delivery execution. Knowledge of customer business and processes by way of meeting the required expectations are the most important assets in the industrial services business. The expectations required cover matters such as customer needs and values.

4. Customer front-end and market information

Good customer relations and correct market information should be continuously maintained. It is recommendable to maintain ongoing communication with key customers in order to achieve a good understanding of market developments and related changing customer needs. Key account managers play essential roles in terms of maintaining customer relations, continuously updating customer needs and assuring correct customer business information and understanding. In order to learn about customer concerns and needs, it is recommendable to organise workshops at the beginning of the quotation process and at delivery execution. Customer-decision making and delivery satisfaction related to industrial services are highly emotionally steered.

5. Organisation and processes

A service business organisation needs to be open and communicative especially with regard to delivery execution, and also utilise multi-expertise teams. High-speed, unhindered information ow is necessary between persons working in such multi-expertise teams. Communication content needs to be in line with the services business.

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6. Change management
The trend within industry is to nd new competitive advantage by way of business networking. Several businesses are in continuous transition from a product-centric business setup towards industrial services and continuously search to identify new customer life cycle process values. This also involves continuous change management on all value chain and network levels. Customer business evolution is the main key point in a services business strategy. This refers to changes in customer values which should be captured by offering new service solutions. This extension takes place by providing different types of lifecycle services to customers, by way of which technology companies can proceed towards knowledge-intensive services and networked centric models.

References
BestServ Forum Round Tables, RTs, during 20042006. (Person/company names mentioned when applicable). Kalliokoski P, Andersson G., Salminen V., & Hemil J, (2003). BestServ Feasibility Study. Technology Industries of Finland, Helsinki. Osterwalder A., Pigneur Y., and Tucci C.L.(2005). Clarifying Business Models: Origins, Present, and Future of the Concept. Communications of AIS, Volume 15, Article 9. Osterwalder A., (2004). The Business Model Ontology A Proposition in a Design Science Approach. University of Lausanne, Switzerland. 160 p. Pulkkinen M., Rajahonka M., Siuruainen R., Tinnil M., Wendelin R. (2005). Liiketoimintamallit arvonluojina ketjut, pajat ja verkot. Teknologiateollisuuden julkaisu 8/2005. Teknologiainfo Teknova Oy, Helsinki. Salminen, V. & Pillai, B., (2005). Integration of Products and Services Towards System and Performance, International Conference on Engineering Design, ICED 05, Melbourne, August 15 -18. Tammela, J. & Salminen, V., (2007). `Modeling Business Innovation Collaboration in Open Infrastructure', ICE 2007, International Conference on Concurrent Engineering, Milano, June 26-28. Spohrer, J. (2006) Service Sciences. IBM Presentation material.

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