Selling Value Add Services

By Todd Youngblood

There is no longer any question in the minds of Distribution executives that generating significant profit from value add services is essential.  I agree emphatically, but submit that it’s only a fraction of the answer to the long-term profitability question.

In fact, the two words “value” and “add” may be the biggest culprits in steering many of us down the wrong path.  Setting our sights on just plain “services” can be radically more effective.

The “value add” modifier implies effort to make the pump, the valve, the tool, the whatever… more valuable.  The component itself is not the point.  Continued commoditization is a fact of life.  Differentiating one brand from another will continue to get more and more difficult.  Increasingly, the same thing is happening to “commodity” services like kitting, assembly and even just-in-time delivery.

Not that traditional value add services won’t always be critical.  They will, however, simply be pre-requisites for staying in the game.  Emphasis needs to shift to providing services that add value to the customer’s business processes.

A success story from another industry is instructive.  In 1994, IBM was under siege from a host of competitive computer and peripheral hardware makers.  They were under immense price and margin pressure and market share was declining sharply.  After more than a decade of selling the “added value of doing business with IBM”, fully half of their revenue and 44% of their profit still came from hardware.  Its stock price was twenty.

In 2001, IBM shares were trading at a hundred and twenty.  This was after the “dot-bomb” Internet bubble had burst.  After their core hardware business had declined to 39% of revenue and 29% of profit.  After a paltry 3% increase in total hardware revenue.  Success came from a 127% increase in their services business.  127%!!!  Up to 45% of revenue and 36% of profit. That’s almost $6 Billion in new and additional profit from services alone! 

After 80 years as undisputed king of the computer hardware business, IBM transformed itself into an Information Technology Services Business.  It did so by taking over jobs that used to be done by its customers and by inventing and applying new knowledge to execute those tasks more efficiently and effectively.  Distributors can and must do the same thing.

It won’t be easy, but there are plenty of lessons learned out there.  Three main themes underlie success in services:

Being Ultra-Customer-Focused means that everyone in your company is obsessed with delivering an ever-increasing amount of value to customers.  It means that customers get continually more dependent on the knowledge and expertise you bring to the table.   

Posters, brochures and exhortations from the boss at company meetings won’t get it done.  Five quantitative metrics that track your Customer Focus performance that are reported monthly, both internally and to customers will.

How Customer Focused is your firm?  What can you do to become more Customer Focused?  Try taking the self-assessment at www.ypsgroup.com/surveyr.asp.  You’ll get back your own “Customer Focus Quick Index” along with some benchmarking data.  More importantly, by thinking about the intelligence behind the 25 questions, you’ll have an excellent start in determining the five most applicable “CF Metrics” for your business.

In terms of tactical TODOs, think about kicking off your CF effort by very publicly announcing your commitment to Customer Focus to both employees and customers.  Put some pressure on yourself! 

Longer term, go beyond – way beyond – the Quick Index with CF assessments that include customer personnel.  Ask more and different questions and continue these assessments via group and one-on-meetings, surveys, Customer Advisory Councils, status reports, etc.  Finally, provide continuing funding for meaningful, visible CF projects.

Process Engineering

Service is process.  Delivering a service means one of two things.  It’s Outsourcing, executing your customer’s business process better/cheaper/faster than the customer can; or it’s Consulting, selling your expertise at applying new knowledge to improve performance.  Since customers (and competitors) get better at and smarter about executing their processes every day, you need to get better at executing and learning at an even faster rate.

Process Engineering is how to get that done.  Its principles must be applied to everything – all internal processes, all external processes, all sales processes, all customer processes.  Relentless, continuous improvement of all processes by all employees equals a Process Engineering culture.

While a detailed discussion of Process Engineering principles is beyond the scope of this article, keep these few basics in mind:

Services Business Model

A services business model is dramatically different from a product-based business model.  For example, activity based costing (ABC) is quite useful in appropriately allocating soft, people and overhead costs into the price of a component.  In a services business, virtually all costs are soft, people and overhead costs.  ABC is no longer “quite useful”, it’s absolutely essential.

Should the price of a service even be based on cost?  Maybe it should be based on value to the customer.  Would a price based on a 200% markup on your costs be gouging even if you reduce the customer’s cost by 50%?  What should you do about your price as your Engineering and Design folks, through their Process Engineering efforts, further reduce your costs?  Lower your price or invest in getting better still?

Then there’s Service Delivery.  First of all, you must be very good at it.  Quality is no longer primarily the responsibility of the manufacturer.  In services it falls directly on you.  Should you therefore exclusively use your own employees to deliver the service?  Is it OK to use sub-contractors?  Is outsourcing the whole thing yourself a better method?  What is the most appropriate partnering approach?  What about combinations of the above?

The sales force is where the real business model changes must occur.  Today their role is identifying how to apply the appropriate part to fix a specific customer problem.  With services it’s changing the way customers do business and then convincing them that you are better than they are at executing that new process.  Reps need to be your primary source of intelligence about what services to offer.  They will need to understand the cost structure of their customers, be comfortable analyzing “Total Cost of Ownership” and be able to deal with objections to transferring work currently done by customer employees to your employees.

Those distributors who will be successful must have thoroughly thought through the five key service-based business functions of Sales, Engineering/Design, Service Delivery, Finance and Quality Assurance and how they inter-relate.

Summary

Big job?  Scary?  It really doesn’t matter much since you probably have little choice.  Transforming your company into a services-based business will take a lot of hard work, learning and change.  Becoming truly Customer Focused, expert at Process Engineering and comfortable with a Services Business Model could well be the biggest challenge of your career.  But challenge is why you love this business, isn’t it?