Digital Transformation of Services

There has been broad interest and accelerated adoption of digital-based business models and technologies across industries, especially evident in IT-related businesses. In IT the transition to business models supported by digital technologies has been evolving quickly. For example, in both hardware (HW) and software (SW) related businesses offerings, we have observed a shift from selling HW products and SW licenses to cloud-processing capabilities and software as a service model (SaaS). In addition, repair and maintenance services that were event-based have evolved to be monitoring and preventive services across a wide variety of industries, including IT. Similar situations have developed in other industries as well: automotive product sales to ride share services, physical distribution of books and music to virtual distribution, printer HW and ink sales to printed page service sales. The list of services offering changes and industries is broad and growing.

The Insight Group recently conducted a study with its key customers to assess what impact the pandemic would have on these digitalization trends. The study summary can be obtained here. We found that the pandemic accelerated and created a burning platform for business model changes in many of the businesses we interviewed. For instance, service delivery models had to be quickly adapted to use digital technologies to remotely diagnose, maintain, and repair equipment where physical access was no longer permitted. Sales models had to be adapted to ensure remote selling was enabled where direct contact was no longer possible. In addition, the client companies were looking for the best way to continue to grow revenue while at the same time recognizing that digitalization was driving an accelerated shift in what services their customers were looking to buy and how they want to buy these services. We also noted in a few cases, non-traditional competitors were being identified with different, digital approaches to the market, e.g., technology and financial industries. These new digital approaches were considered a significant competitive risk.

Developing new digital offerings is critical to growing revenue. Customers are looking for service offerings that produce desired outcomes and results—not just products and services. Developing service offerings will require a deep understanding of what outcome the customer desires. For example, customers may choose not buy test equipment when what they really want is the information that the test equipment provides. In this case, instead of offering to sell test equipment, a company could offer a service that provided information and insight into the result of the testing information rather than just sell the equipment. Once the outcome offering is understood, the process of digitizing the offering can begin by focusing on what the customer needs to accomplish as their objective.

"The rapid introduction of digital-based technologies is shifting the focus to service offerings that deliver to address the outcomes that customers require by using technology tools and processes to deliver the result."

With newly digitalized offerings, the sales and delivery models will also have to be evaluated. A typical product company will now create an outcome service model, often referred to as XaaS (everything as a service model), to adapt its revenue, sales coverage, channel, and distribution models to ensure success and alignment. For instance, in our test equipment example, a company could introduce a monitoring and evaluation service offering (IoT) and/or an AI offering that produces and evaluates data to provide information to its customers instead of selling a piece of test equipment. The potential impact to the sales coverage, sales compensation, distribution, and channel models would also have to be understood and accommodated.

Conversely, under new digital business models services-based companies will be looking to become more “productized/mass configured” for many of their offerings. This means that services companies will be looking to take highly customized fee-based offerings (e.g., business process outsourcing) and standardize them to menu-based configured offerings. For example, customized help desks have moved to a more menu-driven approach. This approach has allowed service call centers to increase productivity through higher call volumes. Standardization will also enable customers to buy in a manner that is easier for them such as self-service. To accomplish this, services companies will invest in tools and processes that promote more standardized delivery methods, processes, and tools. Services companies that implement this well will be able to grow revenue more rapidly. A deeper discussion into the changes necessary in sales and delivery models to execute a more outcome-based service model will be contained in a later brief.