B4B co-author and TSIA president and CEO J.B. Wood delivered the opening keynote at TSW 2013 Service Transformations conference, where B4B was officially launched to incredible response and enthusiasm. Below is a writeup highlighting many of Wood’s direct passages from that keynote that continue to be relevant to the future of the technology services industry. It’s a must-watch video, and a must-have book for your business arsenal. Get ready for the new B4B era as we enter into a new and exciting time for tech services.
B4B: The Next Generation of Technology-Fueled, Data-Driven Operating Models
Wood opened up his keynote address on this provocative note:
“The world of technology is changing at a rate that few people could have predicted just a few years ago. Business models and brands that have stood triumphant for decades are shattering. Whether your company is going to be a beneficiary of these disruptions, or a victim of them, is probably not yet known. Cloud, OpEx pricing models, more software and less hardware, moving things from on-premise to off-premise: is this good news for your company? Is this not good news for your company? For many, the jury is still out.”
TSIA first introduced the concept of the consumption gap in the 2009 book, Complexity Avalanche: a model based on the inability of customers to consume all of the advanced capabilities that our technology holds. We’ve witnessed this problem come into clear focus over the last few years. Then in 2011, Consumption Economics was released as new pricing models had come along (e.g., SaaS, infrastructure as a service, or IaaS, managed services) that were dependent on consumption. Revenue was now becoming tied to customer consumption.
With the just-launched book, B4B, a new framework is now in play. “This new framework is not just about pricing and it’s not just about customer satisfaction. This is about a fundamental transformation of our industry,” says Wood. “Over the next few years, this transformation will touch every aspect, not only of your company, but of your customers’ companies. How they think, how they operate, where they invest.”
Out With the Old, In With the New
B4B is not written solely for service executives, nor is it written solely for service delivery folks. There is not any one part of the company can solidly answer the quandary that the industry seems to be in right now. Rather, it was written to break a cycle that we at TSIA are seeing in company after company: The old business models that we’ve been running for decades aren’t working as well anymore.
“The former models, the plays we knew how to run that were so successful, are starting to show signs of decay for many companies,” says Wood. And the answer is not to do more, more, more of what we’ve always done. We know from experience that “what we’ve always done” doesn’t apply forever. Times change, businesses change, customers change. And so we need to change our models from time to time, when the old ones no longer work.
The Great Divide
A core concept at the very heart of B4B is “The Great Divide.” Suppliers’ sole focus is to build and sell products. But our customers have a different focus: to run a business and get great outcomes. The next decade in this industry will be about that white space in the middle of The Great Divide (see Figure 1).
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According to Wood, “How we organize to improve what happens in that white space, how we journey from being a product-oriented supplier to a business partner with our customers, is going to determine whether you’re a victim or a beneficiary of all the disruptive transformations that are going on right now.”
TSIA doesn’t think there are hundreds or thousands of permutations; we think there are just four basic models that your company can choose to go to market with: the Level 1, Level 2, Level 3, and Level 4 supplier models.
Level 1 Suppliers
The B2B model that most companies accept as their strategy came from a time in business history that dates back over 100 years. B2B was about companies that sold something TO someone. This model gets its roots from post-industrial revolution manufacturing companies. This was a great framework that has worked well, up until now.
These were manufacturing companies, and they’ve operated according to the “make, sell, ship” model. “Make, sell, ship has been at the heart of tech since it was founded,” says Wood. “And make, sell, and ship is okay when the product is simple. This financial model, what we call a Level 1 supplier, became pretty well understood. Most revenue was product-related, you had some costs that you knew you would incur, and you pretty much knew what the profitability of that business model was. And over a period of decades, we got pretty good at optimizing that.”
Because of this accepted business acumen, customers began to concede to what the manufacturer’s job was, and what their job was. For suppliers, it was make, sell, and ship. For customers, it was own, operate, and get an outcome from that solution. This became the norm, and it worked for a long time, and there are still parts of the industry where Level 1 works, where products are very simple.
Level 2 Suppliers
But today, we live in a world that’s being “eaten by software,” according to Wood. “As soon as you take a simple product and begin adding loads of software to it, and then integrate that into something larger (e.g., a complex system, a manufacturing line, an enterprise-wide solution), it’s now a complex product.”
Make, sell, ship was no longer working. Customers needed help in reaching their business outcomes. So “service” was added into the playbook about 30-40 years ago. “The Level 2 model of make, sell, ship, and service was more profitable than simple manufacturing. And Level 2 has had an unbelievable ride,” says Wood. “But with Level 2, we only went right up to that line in terms of what we did vs. what the customer did, and then we stopped. ‘We’ll make it, sell it to you, install it, and maintain it. But you, Mr. Customer, own the outcome.’ We didn’t cross that line, because if we step over that line into the customer’s complexity, all of our economics would break … We stopped at delivering the result for customers. And we believed that this business model could go on forever.”
But because most Level 2 services are product-attached, this model is now breaking. They just no longer work for many of us as well as they used to. So with the older models being under duress, and the new models being significantly unprofitable, what do we need to do differently? B4B suggests that there is a new way of thinking. It’s about not only making and selling something TO the customer; it’s about sticking around and delivering a business result FOR the customer. Businesses FOR businesses. B4B.
Level 3 Suppliers
The move to Level 3 is a larger concept, whereby the supplier crosses over the line into helping its customers achieve business outcomes with the supplier’s products (Figure 2).
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As a supplier, you say to your customer: “I can monitor your consumption for you. I can begin to accelerate the adoption of your users. I can begin to accelerate the adoption of the performance of the technology. Our business model is now to sell you technology and stay connected and engaged with you, day in and day out, to help optimize the returns you’re getting from these investments. We’re going to drive more revenue, we’re going to drive down your internal costs, we’re going to create new pools of money, new value sources that we can begin to price into and collect in the form of revenues.”
“We don’t think this has to be an unprofitable model,” says Wood. “We believe that if you think differently about life as a Level 3 company, you can have both high growth and high profits. And we’re working to figure out how to go do this. And this is not conversation that the services organization can have by itself. This is a journey the [entire] company has to go on, to think about how to operate differently in a new world, and to do that profitably.”
Level 4 Suppliers
But even Level 3 (what most SaaS and IaaS companies are) is not the end of the road. There’s something else out there. “At Level 4, you only charge customers for the outcomes they get,” Wood explains. “They don’t commit to buy software, they don’t commit to buy hardware, they don’t commit to buy scanners; they sign up to pay for a business result.”
More and more customers are looking to pay for what they use, and nothing more. “That has scared us to death in the past. We love these big deals, these big lock-in contracts, and maintenance, and all of the things we can depend on and model. But the market’s shifting. Customers are very clearly saying, ‘I want to align my outcomes, my results, with (Mr. Supplier) your results. If I succeed, you succeed. If I don’t succeed, you don’t succeed.’”
Sounds fair, but it’s not a model we know how to do well. If you look at the far left of Figure 3, as a Level 1 company, you just had to focus on the product. But as the product grew in complexity, you had to have a portfolio and think about things like implementation, education, and maintenance. Now today’s SaaS and IaaS companies have to have all of these things as well.
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“In the Level 3 pricing models…no use, no pay. At Level 4, you’d better be ready to bank the company on your ability to drive customer results, because that’s what you’re going to monetize. Many companies don’t really know what their customers even do with their technology once it’s installed. Think about that. Do you really know what they’re doing, how they’re doing it, how much they’re consuming? We’re going to have to know. Because the market’s moving in that direction.”
The remainder of Wood’s keynote addresses how we can move through the new B4B business model with success, and that it’s not something that is “scary” at all. You just need to be informed, be prepared, and be an active part of the new strategy. This is going to be the most exciting decade the tech services industry has ever experienced, but we’ve got to be courageous, and we’ve got to move.