Success from entering the industrial solutions business
Customer-specific combinations of products and services generate greater customer benefit and thus a higher price.
If products and services are offered as customer-specific combinations, called solutions, they are a striking competitive advantage in service sales. But this requires rigorous remodeling of the current business model. Only by precisely analyzing customer needs and estimating the solution's value can you get the right price for it.
Flat growth and falling margins coupled with ever-higher profitability demands from shareholders drive companies to search for new, high-margin business segments. Solutions, in the form of a customer-specific combination of products and services, coupled with a service promise or guaranteed service level, are often a good way of further developing the current business. One advantage of the solution business is that companies work more closely with their customers, getting to know them and their needs better and thus creating even greater customer loyalty – as long as the company can actually keep its promise with the solution offered. Also, revenues from service and solutions businesses are usually less volatile than in the business to date. But the reality is that nearly all efforts to take this step for the first time underestimate the demands of this new business. It is normally subject to different factors than the former product and service business and therefore requires different skills.
For customers, the benefits are clear: solutions providers can handle certain business processes more cost-effectively, make equipment more efficient and boost their availability, as they know the technology better than the operator. They can structure collaboration in a particular area so as to add value for both parties. It is often initially the interaction with a solutions provider that leads to a fact-based discussion of the value of services or activities. In many cases, an external partner can offer better solutions. A frequent problem for customers is that solutions purchasing is done by staff too low down in the hierarchy. What head of internal office and security services would want to be replaced by an external solutions provider? This decision should therefore rest with the Chief Financial Officer or Chief Operating Officer.
Flat growth and falling margins coupled with ever-higher profitability demands from shareholders drive companies to search for new, high-margin business segments. Solutions, in the form of a customer-specific combination of products and services, coupled with a service promise or guaranteed service level, are often a good way of further developing the current business. One advantage of the solution business is that companies work more closely with their customers, getting to know them and their needs better and thus creating even greater customer loyalty – as long as the company can actually keep its promise with the solution offered. Also, revenues from service and solutions businesses are usually less volatile than in the business to date. But the reality is that nearly all efforts to take this step for the first time underestimate the demands of this new business. It is normally subject to different factors than the former product and service business and therefore requires different skills.
For customers, the benefits are clear: solutions providers can handle certain business processes more cost-effectively, make equipment more efficient and boost their availability, as they know the technology better than the operator. They can structure collaboration in a particular area so as to add value for both parties. It is often initially the interaction with a solutions provider that leads to a fact-based discussion of the value of services or activities. In many cases, an external partner can offer better solutions. A frequent problem for customers is that solutions purchasing is done by staff too low down in the hierarchy. What head of internal office and security services would want to be replaced by an external solutions provider? This decision should therefore rest with the Chief Financial Officer or Chief Operating Officer.
Customer value added through optimum combinations
A solution is aligned to a specific customer need. It consists of existing and new products and services. These are combined to add more value than the sum of their parts.
Companies are increasingly looking for partners to share the responsibility for boosting competitiveness or take on tasks not directly related to the core business. This drives the demand for solutions.
Energy producers in a deregulated market are one example. The main cost drivers of operating a power plant, besides the cost of fuel, are efficiency and plant availability. If the power plant manufacturer now offers the operator an efficiency-boosting solution, the costs per kilowatt hour generated fall. This solution consists of spare parts and refined parts and possibly also of a new operating system as well as training for power plant staff. Another solution may be to optimize maintenance intervals and thus boost the availability of the power plant or at least adapt to the fluctuations in demand. This also leads to higher sales and profits for the energy producer. Both examples allow the solution to be financially evaluated. Providers of this type of solution therefore try to offer new pricing models when calculating the price based on the value generated by the solution, rather than using traditional markup costing.
Another example is a provider of security solutions such as access control and surveillance systems for buildings. A solution is required for a production hall in which pharmaceuticals certified by the US Food and Drug Administration are manufactured. Traditionally, video cameras and swipe-card readers are offered as individual components of access control, but today the risks are being discussed and the possible damage through theft of documents or contamination of substances quantified. The solutions provider itself decides which components, services, system and how many security staff are used. The solution package is now the guarantee of a particular service level in access security. The guarantee is priced as a percentage of the risk, linked with a penalty for a breach of the guaranteed service level. The price premium achievable for a good solution is often combined with a penalty for breach of the promised service level.
Companies are increasingly looking for partners to share the responsibility for boosting competitiveness or take on tasks not directly related to the core business. This drives the demand for solutions.
Energy producers in a deregulated market are one example. The main cost drivers of operating a power plant, besides the cost of fuel, are efficiency and plant availability. If the power plant manufacturer now offers the operator an efficiency-boosting solution, the costs per kilowatt hour generated fall. This solution consists of spare parts and refined parts and possibly also of a new operating system as well as training for power plant staff. Another solution may be to optimize maintenance intervals and thus boost the availability of the power plant or at least adapt to the fluctuations in demand. This also leads to higher sales and profits for the energy producer. Both examples allow the solution to be financially evaluated. Providers of this type of solution therefore try to offer new pricing models when calculating the price based on the value generated by the solution, rather than using traditional markup costing.
Another example is a provider of security solutions such as access control and surveillance systems for buildings. A solution is required for a production hall in which pharmaceuticals certified by the US Food and Drug Administration are manufactured. Traditionally, video cameras and swipe-card readers are offered as individual components of access control, but today the risks are being discussed and the possible damage through theft of documents or contamination of substances quantified. The solutions provider itself decides which components, services, system and how many security staff are used. The solution package is now the guarantee of a particular service level in access security. The guarantee is priced as a percentage of the risk, linked with a penalty for a breach of the guaranteed service level. The price premium achievable for a good solution is often combined with a penalty for breach of the promised service level.
Providers have to know exactly what their customers need
The specific customer need at the heart of a solution must be understood precisely. An integral view by the customer or customer employee at various levels (CEO, CFO, COO, head of maintenance, purchasing) is thus important ( ). Not only to record the problem from all sides but also understand what the solution to the problem is worth to different people in a company. The most common mistake is to develop a solution based on existing capabilities and an internal view without discussing it in detail with the customer. Theory is no substitute for customer talks and workshops with sales staff. Customer needs also change over time, so future needs have to be anticipated.
The value of a solution is best quantified by measuring the impact of applying a solution on the corporate profit and loss account. Returning to the first example mentioned, this would be the additional amount of energy the power plant operator could sell after successfully implementing the efficiency-boosting solution. The solution provider must really know the cost or earnings structure of its customers and be able to estimate the influence of the solution on the individual components. This is usually done together with the customer, because especially when prices are set according to the value of the solution, joint assessment is important.
This customer dialog requires skills rarely found among salespeople in the pure product or service business. The selling process is usually complex, but it takes longer, involves more people on the provider and customer side and is based on the value that the solution should add for the customer. This process often optimizes not only the improvement of machine performance, but entire corporate divisions or even a whole company. The salesperson also has to be able to explain this value to the customer and achieve a fair price for the value added. This often means hiring and/or training a new sales team as a springboard for entering the solutions business. Most companies underestimate this hurdle. In addition, solutions are usually not bought by the same contact people responsible for purchasing products or services. A solution often involves outsourcing parts of a company to the solution provider ( ). The purchase decision is therefore made by management. The existing salespeople normally have no contact to those who decide on solutions. In this case part of the customer relationship must be reestablished, preventing rapid entry into the solutions business.
Another underestimated problem is the assumption that the solutions can be handled using the same business model and the same processes, employees and capabilities as conventional products and services. Of course you need expertise from conventional areas but also the integration of this expertise and the ability to extract the planned value for the customer in the application of the various products, services and tools. Many companies fall at this hurdle, as they need new processes that take account of the complexity of a solution and the corresponding customer dialog. These demands are usually underestimated. The result is that many companies earn little or nothing in the solutions business.
The solutions developed must be based on a competitive advantage that cannot be copied. Once this has been guaranteed, it makes sense to invest in developing solutions. However, solutions must be designed in modules to create cost and efficiency benefits for the solution provider. But they are usually a combination of existing components that, while they do solve a specific customer problem, are not so unique that competitors cannot copy them. And the way they are designed allows customers to split them into components and buy these individually.
The value of a solution is best quantified by measuring the impact of applying a solution on the corporate profit and loss account. Returning to the first example mentioned, this would be the additional amount of energy the power plant operator could sell after successfully implementing the efficiency-boosting solution. The solution provider must really know the cost or earnings structure of its customers and be able to estimate the influence of the solution on the individual components. This is usually done together with the customer, because especially when prices are set according to the value of the solution, joint assessment is important.
This customer dialog requires skills rarely found among salespeople in the pure product or service business. The selling process is usually complex, but it takes longer, involves more people on the provider and customer side and is based on the value that the solution should add for the customer. This process often optimizes not only the improvement of machine performance, but entire corporate divisions or even a whole company. The salesperson also has to be able to explain this value to the customer and achieve a fair price for the value added. This often means hiring and/or training a new sales team as a springboard for entering the solutions business. Most companies underestimate this hurdle. In addition, solutions are usually not bought by the same contact people responsible for purchasing products or services. A solution often involves outsourcing parts of a company to the solution provider ( ). The purchase decision is therefore made by management. The existing salespeople normally have no contact to those who decide on solutions. In this case part of the customer relationship must be reestablished, preventing rapid entry into the solutions business.
Another underestimated problem is the assumption that the solutions can be handled using the same business model and the same processes, employees and capabilities as conventional products and services. Of course you need expertise from conventional areas but also the integration of this expertise and the ability to extract the planned value for the customer in the application of the various products, services and tools. Many companies fall at this hurdle, as they need new processes that take account of the complexity of a solution and the corresponding customer dialog. These demands are usually underestimated. The result is that many companies earn little or nothing in the solutions business.
The solutions developed must be based on a competitive advantage that cannot be copied. Once this has been guaranteed, it makes sense to invest in developing solutions. However, solutions must be designed in modules to create cost and efficiency benefits for the solution provider. But they are usually a combination of existing components that, while they do solve a specific customer problem, are not so unique that competitors cannot copy them. And the way they are designed allows customers to split them into components and buy these individually.
Management must support ideas for good solutions
An important basis for the development of a solution provider is a good service business that offers more than just spare parts. This experience helps to refine customer understanding and develop ideas for lasting-value solutions. In most service businesses there are a few salespeople who have ideas for good solutions, but cannot realize them due to lack of management support.
Many companies have taken the plunge into the solutions business in recent years. Some were successful but most got off to a shaky start. Some of these companies quit because they earned enough from conventional business and shied away from spending time and money rethinking their business model. The main reasons for these failures are well known. Only those who do their strategic homework properly when developing a solutions business will do well: this means researching customers' needs, understanding the value of a potential solution for the customer, and establishing the right internal skills and conditions for developing, selling and carrying out the solutions. There are highly profitable solutions in many industries – you just have to conquer the business systematically. Nobody becomes a solution provider overnight.
Many companies have taken the plunge into the solutions business in recent years. Some were successful but most got off to a shaky start. Some of these companies quit because they earned enough from conventional business and shied away from spending time and money rethinking their business model. The main reasons for these failures are well known. Only those who do their strategic homework properly when developing a solutions business will do well: this means researching customers' needs, understanding the value of a potential solution for the customer, and establishing the right internal skills and conditions for developing, selling and carrying out the solutions. There are highly profitable solutions in many industries – you just have to conquer the business systematically. Nobody becomes a solution provider overnight.
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