Transitioning to a service business: Meaningful servitization planning, healthy cash flow, and proven trajectories
We have talked with many business leaders about the best ways to conduct servitization planning and by and by transforming the business. There are some good practices that we can recommend in readying for the transformation. Today’s blog post provides an overview.
Starting with a realistic, measurable, three-year plan
Three years is a reasonable timeframe for the initial servitization planning that encompasses the transition. While your organization probably has goals and ambitions that will take it five to ten years to realize, planning the servitization journey for a longer timeframe may not be practical. When it comes to relatively new and changing technologies such as the IoT and the cloud, unexpected developments and innovations may have an impact on your servitization planning and make detailed longer-term projections less than realistic.
Servitization planning should consider the unique strengths and experience of the business and its brand. To be truly strategic, it needs to conceive of the servitization effort as an organic extension of the company’s journey and values. Companies need to set achievable, reasonable goals, take the time to learn and adapt, and ground their servitization initiative in a deep understanding of customers, prospects, and markets. As you plan the new service business, you need to be ready to show investors and customers how the bottom line pencils out and how the company will create value from now on. Ensuring a sound financial footing in the early stages of the servitization journey may require a capital investment that investors and company leadership need to be comfortable with.
Each company needs to define its own servitization roadmap with achievable milestones. Companies we know plan on generating 25 percent of their sales to new accounts from services during the first year of the servitization initiative, increasing to 40 percent in the second and to 70 percent in the third year. By then, or at some definable point in the future, no new sales will follow the product model anymore and all revenue will come from services.
Managing for a sustained cash flow
Maintaining a healthy cash flow is the concern we hear about the most when business leaders discuss their servitization planning and supporting initiatives. Many of them are willing to forego a portion of their upfront revenue to convert the business into one that thrives by a monthly service income. In the build-up to the transition, they economize and build up their savings to be better positioned if revenue generation is slower than expected. They make use of automation to reduce the need for employee intervention and reduce the cost of transactions, and find opportunities to make daily business activities, such as invoicing and managing payments, more efficient and simpler. They pursue better payment terms with vendors and review their customer accounts to forestall challenges from customers who may not be a good fit for the servitization business.
When it comes to managing their income, many companies preparing for servitization become more thorough and efficient in collecting their receivables in a timely manner. They also review their pricing options, analyze the financial performance of their customer accounts, keep close tabs on what competitors are doing, and establish meaningful performance metrics that they track diligently. These companies find it helpful to know with certainty what their profits are over the lifetime of a services agreement, and when they reach the break-even point. They gather feedback from their clients so they can understand how their pricing structures work for them, and they take care to verify the profitability of each account as well as overall. Because their business analysis helps them move forward with those customers who see the value in the servitization model, they minimize the risk on payment defaults. They may also consider financing options as an additional layer of financial security.
Three main avenues to the service business
There are many ways to transition into a service-based business; servitization planning should not become too attached to any one of them, because flexibility may be called for. Organizations have to find their own best way to produce profitable revenue and offset expenses. Some of the most common and successful approaches:
- Channeling service and traditional business by deal sizes. Some companies designate smaller transactions up to a certain threshold to produce monthly recurring revenue and sell larger deals under the traditional model. That more substantial business then provides the cash to support the gradual change in the nature of the business. It may take a smaller cash outlay to win new customers for this relatively cautious transition. On the other hand, it may take the smaller volume of the services transactions a long time to amount to substantial revenue. The company can adjust the revenue-generation percentages as servitization becomes the option that customers prefer and that increasingly fits their operation and requirements best.
- Services for all new business. Others manage all of their new business as services with monthly recurring revenue and revert to the traditional practice only if customers strongly object. This approach typically involves clearly defined and achievable goals, and requires the sales team to cultivate the discipline of presenting every prospect initially with the service offerings. To pull this off, employee mind sets and company culture have embraced far-reaching servitization planning and transformation, with minimal acceptance for exceptions to the new services practice.
- Incremental progress. A third transition approach lets organizations build their services revenue more slowly, introducing the servitization model to a small number of customers at a time. Companies’ services organically complement and extend their other offerings, address high-profile customer needs, and are easy to deliver. Incrementally, companies move also their existing customers over to the services, and introduce new services to augment their monthly recurring revenue.Other posts in this series:
- The case for servitization: Improved revenue generation for manufacturers and a better experience for their customers
- Become a more valuable company by following a servitization strategy
- The quality of the servitization customer experience is what ultimately moves customers to your services model—or not
- Servitization sales present many more opportunities, but require a more customer-centric approach
If you’re interested in discussing servitization planning and any of the issues the transition brings up, or have questions and feedback, I would love to hear from you. Get in touch with me or contact To-Increase.
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