Today I want to focus on a transition happening in the technology services industry driven by some macro trends. This issue appeared on my radar screen while I was looking into the business models used by technology services firms such as IBM, Cisco, and SAP. It is the emerging phenomena that some have called the outcome economy. The outcome economy in technology services, as SAP defines it, is the leap from selling software to selling outcomes to its customers. The old economy was an output economy. As you know, an organization’s outputs are its products and services, or its projects and programs. In technology services, the output economy involved selling boxes of software to customer organizations, so that their internal IT department could install and manage the software on in-house servers. Vendors also sold software directly to individual consumers, for example, Microsoft Windows or MS office.
The new economy is outcome-based. It involves delivering results valued by customers, while providing software as a service in the cloud. In the Outcome Economy, selling an outcome is much more complex for the vendor than selling a product (or output) because delivering outcomes typically involves an integrated and managed end-to-end process.
Now, long-time listeners to this podcast may be wondering whether the outcome economy refers to ‘outcomes’ in the same way as we have used them in the past when discussing organizational effectiveness. The quick answer Is ‘not exactly,’ since those promoting the outcome economy do not define their terminology in a precise way, but let’s not quibble over terminology just now. Today’s discussion is simply a report on trends in the technology services industry, which may have lessons for the rest of us, since these trends are likely to spread elsewhere in the future.
Let me outline three macro trends in the market that I believe are pushing the disruption in technology services.
1. The search for knowledge worker productivity. Today, all knowledge workers require technology services for productivity, and there is a continuing need to enable higher levels of capability and productivity as time goes on and applications evolve. Knowledge workers in the traditional professions include doctors, lawyers, and teachers, to name a few. Knowledge workers master a body of knowledge and apply it to accomplish a task. Knowledge workers become productive within a system that manages the scheduling of the work with the worker. It is a system that either they create themselves (if they are running their own practice) or someone else creates for them (as part of a larger organization). The basic ingredients of the system for knowledge worker productivity can be divided into two categories: a) back office operations — which takes care of the administrative functions, such as personnel, accounting, budgeting, maintenance, facilities, etc., and b) production operations — which organizes the internal production tasks in order to acquire the work (from a customer), and then distribute the work to the individual knowledge workers in a logical, timely, and efficient manner. The knowledge worker remains in control of how the knowledge is applied to the work. Technology services vendors are enhancing the basic productivity model for knowledge workers by adding additional services, such as cognitive computing (e.g., IBM’s Watson in the medical field) to diagnose problems and suggest solutions based on the latest research. Many fields are becoming so complex (e.g., medicine, law) that no single knowledge worker can keep up with everything that has changed since they graduated. Cognitive computing addresses this problem, striving to extend the reach of knowledge workers in new ways.
2. Outsourcing in search of lower costs. Pervasive internet connectivity, together with mobile and cloud computing, are leading to outsourcing and some atomization of business processes in a search for improved efficiency and lower cost. For instance, because everybody is connected to the internet, we can have Virtual Assistants in the Philippines (who act like they are simply part of your office), or social media services optimization by vendors in India. This is just the tip of the iceberg, and the trend is leading to the outsourcing of bits and pieces of processes where it makes sense to do so.
3. Increasing customer expectations. Customer expectations are increasing, and organizations are integrating technology within their offerings to compete. The customer experience, particularly the customization of that experience for the customer by the organization, is increasingly being driven by algorithms. The best experience that the customer has had is driving expectations toward higher and higher norms. For instance, Amazon knows what you have bought in the past, and suggests what else you might be interested in now. Your car, once repairable by you a few decades back, but no longer (yet it monitors itself, and alerts you to a problem). Your kitchen appliances are increasingly being connected to the internet (IoT), and they can schedule a service call before a major problem occurs.
Technology services vendors report that the revenues from their old business models are decreasing rapidly, and they are searching for new ways forward. Many have already moved away from selling software boxes and are now selling software subscriptions (e.g., Microsoft office). Smart analytics and the Internet of Things (IoT) has made it possible to move from the “break it-fix it” model to the “fix it before it breaks” model involving offerings that are sold as a service, tied as closely as possible to business outcomes. These trends have been termed the outcome economy, the consumption economy, or the B4B economy — simply different terms for the same macro trends. In the outcome economy customers pay on the basis of usage (e.g., a cell phone contract) or on the basis of business outcomes (e.g., hours of jet engine operation for an airline, rather than allocating capital toward aircraft engine ownership).
Technology services is complicated, and can be scary for customers. The customer needs (and values) a trusted advisor and partner with whom to chart their journey into the future. Vendors are best placed to absorb the risk of the journey for their customers. In return, they can experience high adoption and renewal rates for their new as-a-service offerings.
In summary, the writing is on the wall. Old business models in technology services are dying as part of the outcome-based economy, and new ones are taking their place. For some, their current situation represents a burning platform, and it creates a “bet the farm” moment, requiring a major change going forward. It must start with what their customer wants (an outside-in approach), and big new investments are likely to be needed going forward to make the transition a reality. Vendors must convert their burning platform into burning ambition, in order to successfully overcome an adverse situation and claim a new future within the outcome economy.