The success of IBM Global Services has served as an example of how an equipment vendor can effectively build a services competency. However, IBM Global Services is an exception to the rule, in that its success appears to be impossible to emulate, with many vendors failing to create viable services businesses.
Most of the work Frost & Sullivan has undertaken in this field has been for vendors looking to mitigate risk. The downturn in the ICT market has impacted revenues and consequently margins have been forced down. In order to maintain margins, vendors are looking at services, which they perceive to have higher margin opportunities.
Vendors fail to understand how and why customers purchase services
In many cases, equipment vendors believe that their services value proposition lies in the fact that they know their customers and understand their needs. These value propositions however, disguise some large assumptions that if go unchecked can threaten vendors' attempts to build a viable services business. The first assumption for vendors to address is that they know their market. Although they know or should know the market for their products very well, our experience shows that they rarely know how their customers buy services.
In most cases, vendors have difficulties in proving they can be accountable for projects and in demonstrating its understanding of competitors equipment. Indeed, our research shows that clients in some industries are more predisposed to employing an equipment vendor to offer project management services if their equipment forms the majority of the project. Equally, end-users are less likely to require the services of an equipment vendor if their equipment forms a minor part of an implementation. In these cases, they will prefer to use an independent third party with specialist knowledge of their industry. The interesting point to come from this research was that a significant proportion of companies acquire services (either from equipment vendors or professional services organisations) in order to learn the skills themselves.
This suggests a well-defined window of opportunity for equipment vendors to successfully develop services as a revenue generating operation. By actively targeting opportunities where it meets these requirements, an equipment vendor may see its bid conversion rates improve. At the same time however, vendors must be aware of perceptions its target market hold of its capabilities and therefore value it is perceived to offer the market. This is not to say that the vendor cannot challenge these perceptions. However, to develop the capabilities and a track record in higher value services offerings, it must make money in the short term through focusing on quick wins based on services their customers expect of them.
Vendors do not understand which service elements customers really value
The second assumption is that they understand their customers' needs. Again, they may understand their needs from a product point of view, but in practice they have little indication of what the customer perceives of as a valuable service. For instance, by not previously pinning a price on the services offered vendors have effectively rendered the services value-less to the client. To begin charging for these services at this stage runs the risk of alienating customers.
At the same time, however, more complex systems integration is a valuable service and is for the most part recognised as such. If the customer lacks the in-house skills, the vendor may have an opportunity to offer this service. Even then, customers may be concerned that the vendor's knowledge of other vendors' products is limited and may call upon a third party to render the service. In this respect also then, rather than 'vendor neutrality' being the issue, multi-vendor product knowledge, and the ability to demonstrate that knowledge are the essential requisites.
Equipment vendors looking to add value to their business by ramping up their services offerings face a dilemma. Either they begin to price services they have previously not charged for or they build up their consulting capabilities to offer vendor neutral higher value services.
The first option risks alienating equipment customers and damaging the vendors core business. The vendor also risks failing in its objective of driving up overall profit margins because there is a limit on the prices a vendor can charge for such services.
The second option is thus the route many vendors take to drive up margins. Whilst there are on the surface compelling reasons why vendors feel they can successfully develop, market and sell a range of services, there are significant hurdles for them to clear before they can claim success.
Vendors need to think hard and be realistic if they want to a successful services business. Targeting specific market needs and building capability around them will be the most likely path to success in most markets. Whilst vendors are developing the skills to do this, they should focus on quick-wins to generate case studies and short-term revenue.
Andrew Tanner Smith ist Industry Analyst bei Frost & Sullivan.