First day of Technology Services World has come to a close. The conference dialogue has been excellent—from the TPSA advisory board meeting Monday morning to the hallway conversations after the opening keynotes. The common theme today is “investment in services innovation.” Or, more appropriately, the LACK of investment in services innovation. Services executives from attending companies agree their companies do not dedicate much (if any) resources to innovating services offerings. Yet, we know services revenues and margin dollars are a significant component of profitability for the vast majority of these technology companies. Before we get too frustrated with tech executives, I think we should bring the lens back and look at the bigger picture of services innovation investment.
Here are a few facts that are difficult to dispute:
- Roughly 70% of developed economies (U.S., European Union, etc.) are based on services. Not agriculture (what economists call primary economic activity), or manufacturing (secondary economic activity), but services (tertiary economic activity). Yet, the governments of these developed countries are barely investing in research to better understand and optimize services activities. Europe is more advanced here and Germany is a poster child for government investment in services science—but the global dollars are still minimal compared to the economic importance of this sector.
- Although college graduates are VERY likely to spend their careers delivering services, they have minimal opportunities to take courses that teach the basics of building, managing, and optimizing a services business.
- And finally, although hardware companies typically obtain over 35% of their revenues from services and software companies typically obtain more than 70% of their revenues from services, product technology companies have little interest in investing in any form of services research or innovation.
Three ugly facts that point to one massive disconnect. We live in a services economy. Our technology revenues are services intensive. Our managers need to be services savvy. And yet, no one wants to invest in services innovation. By “services innovation” I mean new techniques and processes for efficiently developing profitable services offerings. I mean new tactics for capturing expertise from services delivery staff and translating it into services delivery improvements. I mean new financial models for understanding the economic relationship between products and services. And I mean new programs to train the next generation of technology business leaders on how to build and optimize service intensive businesses. These are all areas that are poorly understood and poorly explored.
When does the status quos change? When the bottom falls out of product revenue. When software companies can no longer charge a license fee because competitors give the software away for free. When hardware companies can no longer sell a box because the customer can get the same capability through a cloud based services. In other words, when the current model is no longer viable. How far away is that time? Check out www.spiceworks.com. Take a moment to internalize their offering. Here is a company providing IT management software AT NO CHARGE. They don’t even consider themselves a software company. They consider themselves a media company.
One only as to look as far as Detroit to recognize industries rarely change their business models proactively. Change is violently thrust upon companies by customers and market dynamics. When will investment in services innovation increase? When companies and universities and governments have no choice but to invest.