Jan Bosch foto serie 1000×5636

Jan Bosch is a research center director, professor, consultant and angel investor in startups. You can contact him at jan@janbosch.com.

14 March

For all the talk about digitalization over the last decade or more, I still run into many people outside of software R&D who are convinced that digitalization is a technical problem that doesn’t concern them. Often, it’s viewed as an opportunity for improving the efficiency of existing processes and ways of working. The result is that the digitalization efforts in the company tend to address all the secondary aspects but conveniently ignore the core.

The essence of digitalization is the fundamental shift in value delivery to the customer. Moving from a transactional form to a continuous one. This includes traditional service approaches where, for instance, the traditional product is offered as a service or where other aspects of operating the product, such as maintenance, are provided as a service. However, we’re predominantly looking for ways where we can continuously improve the value that we deliver to customers through the continuous deployment of new versions of software, data-driven insights and the use of artificial intelligence.

One core dimension of the digital transformation that needs to be addressed is the business. If we’re unable to capture part of the continuously improving value to customers, we have no incentive to provide this value as we’ll never be paid for it. For instance, automotive companies have, for the most part, connected products and could, for example, run A/B experiments to determine the optimal tuning of engines to maximize fuel efficiency. However, most of these companies lack a business model to monetize the improvements that they could provide. So, even though the customer would benefit, there’s no incentive and, consequently, there’s little tuning of engines after SOP (start of production).

The business dimension of the digital transformation has three main aspects to be addressed: the business model, the sales organization and customer support. To get incentivized, we have to be able to monetize the additional value we deliver to customers. Hence, the business model needs to change.

In most cases, I see companies initially pursue a two-pronged approach where the traditional transaction model is complemented with a continuous business model through which improvements in value are monetized. As an example, one company I work with uses performance contracts to share the value of any post-delivery improvement equally with the customer.

Once the continuous revenue becomes sufficiently large, many companies explore ways to shift revenue from the transactional to the continuous leg and potentially close the transactional revenue stream altogether. One challenge here is that the company cash flow is quite fundamentally disrupted as you now need to finance the equipment at the customer as there’s no upfront payment anymore. In the long run, continuous business models are often more lucrative, but the short-term cash flow shortage needs to be managed.

The second aspect is the sales organization, which, in many companies, has for many years optimized itself along the lines of the old business model. This optimization includes the skills of sales reps, incentives and culture. Asking sales reps rooted in the old model to start selling services and continuous value delivery models without any changes to incentives and training is bound to fail. I know of at least five companies that had successful digital offerings that customers wanted and that R&D had prepared for delivery but that failed as sales was unable or unwilling to sell the offering.

I see three models being used in practice. First, companies try to adjust and train the existing sales organization to sell services in addition to products. Second, within the same organization, there are two groups of salespeople: those selling services and those selling products. Finally, the most extreme version is to create two completely separate business units where one develops and sells traditional products and the other develops and sells service offerings.

The third aspect is customer support. Traditionally, this department has quite a bit of time to build up experience and knowledge after the release of a new product generation. However, when adopting continuous business models and the associated continuous value delivery through, among others, DevOps, the lifetime of one version of the system is very limited and measured in weeks. Consequently, customer support has very little time to accumulate relevant knowledge and the risk is that customers end up without proper support. This is of course a problem for any company but even more so for companies using continuous business models as the switching cost for customers tends to be lower.

In addition, continuous deployment is an important enabler for A/B experimentation and other forms of testing in the field. This results in different customers using different versions of the software in the product, or different configurations in general, and customer support needs to know about the variants out in the field and their support implications. Building up the internal information channels can be a significant challenge as the involved departments traditionally had little to do with each other.

Digitalization isn’t just a technical problem affecting R&D only but touches all functions in the company. The business side is one of the key dimensions and digitalization affects, among others, the business model, the sales organization and customer support. Failing to implement the relevant changes in these organizations will disturb the relationship with customers and put the entire digital transformation at risk. Remember, digitalization is, at its core, a fundamental shift in value delivery from transactional to continuous and this is a business challenge first.