The world has been changing over the past 10 years for hardware companies. Today, faster innovation cycles and falling barriers to entry are driving commoditization, virtualization is fueling demand for software running on industry standard hardware, and everyone is chasing higher margin, recurring revenue offers. Hardware companies are responding to these shifts by augmenting their portfolios to include more software and services offerings, but many are struggling with the transition.
Whether your company is looking to break into a complementary software market, enhance your hardware products with managed services, or respond to the virtualization trend, here are four key steps you should take to address common challenges hardware companies face.
Step 1: Align Your Management Team on Objectives, Financials, and Timing
This transition is significant, and will occur over time and involve many moving parts. Execution becomes easier when executives are aligned on the objectives and rationale for entering the software/services market (e.g., defensive move, making hardware products more attractive, etc.), the timing expectations of the transition, and the financial targets to measure progress against. This can be harder than it seems, especially when there are conflicting internal interests. For example, software/services cannibalization of the hardware portfolio (in the case of virtualization) may pit one part of the organization against another.
Lack of alignment creates internal coordination challenges and can lead to conflicting messages for customers. Being able to crisply communicate the transition broadly is critical to keeping employees engaged, to attracting new customers, and ensuring existing customers do not get discouraged.
Step 2: Design Software and Services Offers, Making Tough Calls Where Needed
Adding new software and service offers to an existing hardware portfolio requires going beyond traditional offer definition. While companies still need to start by defining target segments and buyer personas for hardware, software, and services, they also need to decide on the value proposition, competitive differentiation, and pricing models in the context of each target segment. This can be challenging given the unique attributes of each segment.
One example is when hardware companies begin to compete against software providers that are unencumbered by a legacy hardware portfolio. These companies must position and price new software offerings to win against these new types of competitors, rather than fall into the trap of either protecting their legacy business (by making the software price less attractive) or tying the software too closely to the hardware paradigm. Strategies designed to protect legacy products often confuse customers and hinder sales across both product lines.
Step 3: Create a Hybrid Operating Model that Balances Old and New
Transitions on this scale don't occur overnight, and companies need operating models that enable growth in hardware product lines (which will continue to comprise the bulk of revenue for awhile) and the incubation of new software/service offerings.
However, the DNA of a software and services business is distinct from that of a hardware business. There are typically different buyers, selling motions, value propositions, product lifecycles, support processes, and service elements. A few examples include: recurring subscription or maintenance revenue requires a greater focus on renewals and customer adoption; support models need to evolve beyond hardware replacement; software R&D will have a faster/agile iteration process with more frequent releases.
Companies sometimes go so far as to create separate software/services units and functions to augment the operating model without disrupting the existing business and to infuse their organizations with software-savvy talent across all functional areas, especially in sales, development, product management, and services.
Step 4: Go Above and Beyond to Help Customers Migrate, and Support Customers Who Still Aren't Ready
While the buzz about new capabilities can attract new customers, careful attention must also be paid to current customers, who will comprise a majority of revenue for the foreseeable future. Often, the existing customer base will include three broad personas, for whom tailored messaging will have to be designed:
- Early adopters: excited about the market transition and the vendor's offerings; new offers align with the customer's plans and personal interests.
- Hardware traditionalists: prefer the status quo; may even perceive new offerings and services as a threat to the investment they've made and their personal livelihoods.
- On-the-fencers: open to the value of software/service offerings, but are not quite ready to adopt; could eventually become advocates, but may need help developing and implementing a vision.
Successfully targeting these personas and migrating them will require a series of actions:
- Communicate the vision for the new offerings, and how it solves their business challenges.
- Back this up with data, case studies, and a collaborative approach.
- Reinforce your commitment to serving current hardware markets and customers, and that you'll continue to improve and support existing product lines.
- Communicate a low-risk migration path (particularly if the software necessitates a business model or operating shift), which may include professional services (strategic, design, and/or implementation) to assist.
As highlighted above, the transition from hardware to software and services can be very difficult. While all hardware companies likely see the imperative to develop new software/services capabilities, many are still struggling to make this shift. We dig even deeper into this subject in our co-presented webinar with TSIA's VP of Service Revenue Generation Research, Julia Stegman, titled, "Moving from Hardware to Hardware+Software+Services," which you can watch On-Demand.
Is your business experiencing issues in making the transition, or has your company had success with these or any other tactics? Please share your experiences by commenting below.
About the Authors
Waterstone Management Group is a boutique management consulting firm that helps technology companies and their investors create measurable value by identifying and capitalizing on disruptive growth opportunities and by driving excellence in Services, Cloud, and Customer Success. Waterstone's expertise-driven approach combines deep industry-specific intellectual property and a unique blend of strategic consulting and executive-level operating experience to deliver high velocity strategy and execution.
Neil Jain, Partner, has 20 years of experience formulating growth strategies and improving operations for technology companies.
Chris Kammerer, Manager, works with leading HW and SW providers on strategies to penetrate new/emerging markets and the operating model changes to facilitate growth.