Products and Services: How Oil and Water Can Mix
by Paul Wiefels, Managing Director
The Chasm Group, LLC
During the nineties, most of us in Silicon Valley focused on and relentlessly pursued the hypergrowth phase of the Technology Adoption Life Cycle—that steep rise in the bell curve that we call the tornado (and described previously in my article entitled Storm Warnings). This phase of market development is almost always led and dominated by products, not services. Why products? In markets where demand vastly exceeds supply, product-based offers are the fastest way to escalate supply to meet that demand. Service-based offers, by contrast, do not scale rapidly and inevitably encounter quality and delivery problems in high-growth scenarios.
But outside the hypergrowth phase, service-based offers equal and often beat products as value-providing mechanisms. The key for service providers or product organizations that have service delivery capabilities is tailoring the service relative to each phase of the adoption life cycle. In the early market, where technologies and products are immature, and whole products or solutions are far from available, professional services dominate. These services are, in effect, discontinuity “buffers” shielding end-user organizations from the demands (and over-promises) of the new technology. This is the natural market for systems integrators and business process reengineering consultants, and while novel technology is the catalyst for early market projects, the bulk of the money, as well as the marketplace power, goes to the service providers.
Professional services also hold up well in niche markets, known as bowling alley markets in our parlance. The goal in these markets is to generate solution sets that can be replicated, and thus can penetrate a niche rapidly creating whole-product standards that let your solution dominate the niche over the long-term. Because the problem is specialized and local, the technology foundation often needs additional modifications in order to address the particular needs of the niche. This creates an ongoing market for service providers, typically in the form of third parties including VARs, geography-specific systems integrators, or in-house professional services organizations. They, more than the product providers, have the ear of the customer and the trust of the niche marketplace. These services however must eventually become unnecessary if the product provider is to exploit the mass market opportunities afforded by a category that moves to the tornado phase.
Today, a new service type is emerging. Or rather reemerging. And it’s the one that appears likely to change the dynamics of power in our industry in this decade. In the post-hypergrowth marketplace, after the first wave of product infrastructure has been deployed, when products themselves become increasingly commoditized, the true winning play is to be a provider of transaction services. As anyone who has ever looked longingly at the revenue stream of an eBay or credit card issuer, or even at the warranty and maintenance side of the systems business has realized, recurring revenue from transaction-based offers is potentially the most profitable game of all.
The key to succeeding in transaction services is to capitalize on a mature infrastructure where cost has already been amortized in a relatively stable environment. Historically, this describes industries such as telecoms, airlines, and utilities, where the transaction service is a call, a ride, or a kilowatt; and also the installed bases of proprietary systems vendors, where the most common transaction services are maintenance, warranty, and consumables. In each of these instances, the incremental cost of the next transaction is significantly below the incremental price.
This enviable end-state, however, is proving increasingly more elusive to achieve in our current open-systems transaction services markets. Indeed, it is not clear that deregulated, open markets can ever achieve it. Witness the ongoing fare wars in the airlines industry, the current cataclysms in the telecom arena, not to mention the on-line services popping up yet again like weeds in the spring. It would seem that as soon as you declare to your investors that you will be the endgame winner, you attract competitors who will drag out the competition to the death. Even the best of scenarios may force you to scorch the earth to win. Apparently, in other words, what was presumed to be the most profitable of strategies is turning out to be the least.
How might you think about all this? Well, many companies we know define themselves as either a product company or a services company. We think you should get together with the stakeholders in your enterprise and develop a product/service mix strategy that can evolve over the life cycle. Professional services firms need to decide when and how to “productize” or “transactionalize” their offers. Product companies need to know when to augment their offers with services and when to strip them lean. And transaction service companies need to learn a lot of patience, and to have product or professional services offers to keep them in the game in the meantime.