I need to alter the entry I had planned for today because of a compelling headline that hit the news wire this week:
The article makes the following observations:
- The behavior of Dell’s customers is forcing the company to lower prices to protect market share at the expense of gross margins, a measure of profitability. Earlier this week, Dell warned investors its gross margins will slip slightly in the quarter ending this month, even though it also said revenue will be more than expected. That means Dell will likely keep less of every dollar in revenue it gets.
- The squeeze could jeopardize Dell’s financial performance. It said it’s hoping to post operating margins – another measure of profitability – of 7% over the long term on revenue growth of between 5% and 7% over each of the next few years to achieve that goal. Last quarter, Dell’s operating margin was 4.7%.
I have to admit, this article is a blaring endorsement for the book I am just finishing: Bridging the Services Chasm (Professional Services Press, September, 2009). Here is an excerpt from the Chapter that explains the services chasm Dell now finds itself falling into.
The text that follows is an excerpt from Chapter 1 of Bridging the Services Chasm: Aligning services strategy to maximize product success:
The pending shift in market tides is not the imagination of a few nervous service executives. Several very real-world examples exist of the consequences faced by product companies when they do not successfully align their services strategy to market realities. We will spend more time on the gap between service strategy and market requirements later in the book. For now, let’s focus on the pattern of failure that is very recognizable in established product companies:
1. Disruption: Product market matures or disruptive technology enters the market, making current product less competitive. This phenomenon is well documented and discussed in texts such as The Innovator’s Dilemma by Clayton Christensen.
2. Denial: Company focuses on old technology and old consumption models for too long. The important observation here is that often it is not only what the customer is buying that changes, but also how the customer buys. For example, the shift from closed mainframe systems to open systems in the early 1990s was not just a shift from closed mainframes to open Unix servers, but also a shift from buying hardware, software, and support from one provider to buying best-of-breed components from separate providers.
3. Decline: Top-line revenues stagnate or shrink, and operating income begins to shrivel.
Once again, these first three steps in the failure pattern are well documented and discussed in the literature focused on product company success. It is the next four steps that are less well understood:
4. Services Focus: In an attempt to shore up top-line revenues and profits, the executive management team belatedly announces a focus on service opportunities. There are significant changes in service leadership announced by the company. Often, executives from pure service firms are brought into the product company executive suite. Press releases are sent out detailing a new focus on service revenue opportunities and capabilities.
5. Services False Positive: Service revenues do become a larger portion of total company revenues, but this is largely due to continued maintenance streams on top of a shrinking installed-product base. Very few product companies report the mix of their service revenues. However, the industry associations I work with, AFMSI, SSPA, and TPSA, do collect this mix information in industry benchmarks. Throughout this book, I will refer to this group of executives and analysts at these industry associations that I work with as the collective “we.” “We” can see the swell in maintenance revenues as a total percentage of company revenues.
6. Services Failure: Despite the belated focus on services, total company revenues continue to flatten or shrink. Operating income shrinks as a percentage of total revenues. Product revenues continue to evaporate. Advanced service offerings such as professional, consulting, or managed services gain little traction.
7. Demise: Finally, an abrupt change in corporate direction takes place. Services leadership or overall company leadership is suddenly changed. The company does one of three things: declares a renewed focus on product innovation, declares bankruptcy, or is acquired.
Company circumstances vary greatly as they go through this pattern of failure. Sometimes the disruptive technology was impossible to predict. Sometimes executive improprieties or missteps accelerate the company demise. Despite the variances in circumstances, an undeniable and clear pattern, as it relates to product and service synergies, can be seen. The opportunity is to understand the pattern and identify the window of opportunity where services initiatives can create a buffer of both revenue and margin that can be used to fund new strategic directions. We will explore this concept later in the text. First, let’s review a few of the classic examples of product companies migrating through this failure pattern.
The global economy has thrown Dell into phase three of the failure pattern. The article cited at the beginning of this post also included this statement:
- At its analysts’ day presentation, Dell executives repeatedly promised not to pursue market share if doing so would sacrifice profits. Rather, CEO Dell said his company would pursue high-margin business through acquisitions or research- and-development. He said higher-margin professional services, including cloud computing services, were areas the company was considering.
This type of messaging can quickly migrate Dell to phase four. Phase four is the beginning of a place Geoff Moore and I have defined in the book as “The Services Chasm.” This is a place where product companies become very confused and schizophrenic regarding the objectives of their services business. Obviously Dell does not want to complete the failure pattern. They want to break off of this predictable path. To accomplish this, they will need to successfully align their services strategy with their product strategy in ways that most product companies do not. Which makes the point of my opening statement in the book:
Effectively aligning a company’s services strategy to the overall company strategy will become the defining discipline in any product company’s success.
If you don’t believe this statement is true, I would argue you are ignoring the data—as well as this week’s headlines.