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1、Complementing Product Businesses with Solutions An Approach for Multi-Business Companies,PD Document,June 15,2001,CONFIDENTIAL,This report is solely for the use of client personnel.No part of it may be circulated,quoted,or reproduced for distribution outside the client organization without prior wri
2、tten approval from McKinsey it is not a complete record of the discussion.,Authors:Ted Dezvane(NY),Jochen Heck(NY),Joe Heel(MI),Eric Roegner(CL),Mark Steen(MI),1,The potential for higher margins,deeper customer relationships and increased switching costs attracts many suppliers to solutions business
3、es,but only a relatively small percentage of suppliers(on the order of 25%)have successfully leveraged solutions to capture superior economic returns.The successful companies have demonstrated a number of important qualities which can be used to guide the efforts of new entrants.Potential solution o
4、pportunities can be identified and evaluated based the clients distinctive skills and expertise,its underlying product/service portfolio and detailed knowledge of customer needs.A methodology has been developed to facilitate this process and is complemented by a framework to develop initial top-down
5、 market and revenue potential estimates for these potential solutions.Prospective solution providers have to decide which approach allows them to capture the most value from the solutions business given the degree of risk and investment they are willing to take on(e.g,.full transformation versus inc
6、rementally adding capabilities to existing businesses).In situations where full transformation presents significant implementation hurdles and risks which the client is not fully comfortable with,they may consider an incremental approach.An“incremental layer”which sells solutions across one or more
7、business units can be set-up and launched relatively quickly(e.g.,within 3-6 months)if it has the full support of the participating business units.This incremental approach helps to test the viability of solutions and to move up the learning curve in preparation for a more complete transformation in
8、to a solutions provider later on.,SUMMARY AND CONTEXT,2,Solutions definition and key success factorsIdentifying and sizing the opportunityApproach for defining the organizationImplementation steps,CAPTURING THE SOLUTIONS OPPORTUNITY,3,PRICING COMPARISON BY SUPPLIER TYPE,Relative price index,Bundlers
9、,Component specialists,Integrators,Solution providersDefinitionCombine products and services through technical and commercial integration to create turnkey offerings which meet specific customer needsObjectivesCapture price premiums to cover solutions development costs and contribute to increased pr
10、ofitsDeeply penetrate customer business systems and increase their switching costsElevate and strengthen customer relationshipsBuild and maintain market position superior to other suppliers,Depth of integration,High,Low,Degree of packaging,High,Low,Commercial integration only(subject to“bundling dis
11、counts”),Solutionproviders,Technical integration only,$110,$80-90,$125-150+,$100,Solutions providers can capture significant price premiums in exchange for the customer value they create relative to other suppliers,4,RewardsAccess to new marketsHigh solutions pricing premiums capturedSignificant inc
12、rease in revenues and profits,Negative consequencesUnrecovered investmentPotential loss of credibility with customers,Early efforts,Outcome still unclear,Global Services,Solutions,Underperformers,Clear winners,Telecom solutions,Maintenance,Repair and Operations Solutions,Lucent Solutions,Energy Serv
13、ices,SOLUTIONS PROVIDER EXAMPLES,While many players are attempting to offer solutions,few are emerging as“clear winners”,25%*,75%*,*McKinsey practice assessment indicates that 75%of solutions attempts fail to recover their cost of investmentSource:McKinsey practice experience and assessment of solut
14、ions ready sectors including computers,telecom,chemicals and transport,5,KEY SUCCESS FACTORS FOR NEW ENTRANTS,Develop intimate understanding of customers technical and business system needs and tailor solutions development to those needsEstablish dialogue with high-level decision makers,Consultative
15、customer interface,Top management ownership/commitment,Distinctiveofferings,Build solutions based on world-class components;use external and even competing components when appropriateIntegrate complex systems to create value for customersEnsure offerings are hard to replicate or disaggregate,Get ful
16、l commitment from participating business units for each solutions effortBring together and leverage relevant industry and functional expertise,Integrated processes,Clear governanceand controls,Establish close communication between sales and product/implementation teamsSet up single point of coordina
17、tion and leadershipIntegrated billing and tracking systems(e.g.,for solutions provided from across multiple business lines),Limit focus(at least initially)to a manageable number of industry verticalsDefine performance metrics/responsibilities and integrate with existing governance systems(e.g.,pay i
18、ncentives,review processes)Ensure milestones and key metrics are satisfied;but also allow the business sufficient time to develop and grow(e.g.,up to 5 years),Successful solution providers tend to execute along five key dimensions,Solutions offerings must be aligned with real customer needs and inte
19、rests,6,SOLUTIONS BUSINESS EXAMPLE:IBM,Client relationships transitioned over time from sales force to services principalsLeading-edge,customer-focused research(over 1/3 of all projects in the IBM Research Labs are conducted with customers),Consultative customer interface,Top management ownership/co
20、mmitment,Distinctiveofferings,E-business solutions based on industry-leading customer servicesIndustry-focused solutions(e.g.,point-of-sale systems for retail,banking CRM)Services for proprietary products(network management with Tivoli)Large-scale outsourcing,Integrated processes,Clear governanceand
21、 controls,Matched industry and functional(e.g.,CRM,ERP)experts to support sales processes and develop tailored solutionsTransfer pricing determined through“fair share”system within pricing centers run by finance department(including appeal mechanism)“First win the opportunity,second optimize for IBM
22、,third optimize for your profit center”,Appointed client executive for each industry solutions unit(ISU)across entire IBM businessP&L responsibility on a customer basisCreated 12 ISUs to organize and leverage vertical expertiseLaunched Initiatives like“business integrator”and“e-business services”to
23、move IBM away from products toward customizable platforms,Value proposition:Reduce costs,reduce assets,and free up customer resources by providing design,build,maintain,and operate services to meet customer IT needs,IBM Global Services has been instrumental in helping IBM create and capture value fr
24、om solutions to drive growth for the company as a whole,7,COMMON PITFALLS IN ATTEMPTING TO BUILD SOLUTIONS BUSINESSES,Lacking understanding and appreciation of actual customer needs(push versus pull)Failure to gain credibility and trust(insufficient technical capabilities and/or implementation)Uncoo
25、rdinated/disorganized customer contacts,Taking half measures without shifting real power from existing operating units to an integrated solutions businessNew structures and/or roles without new accountabilities and appropriate performance management processes(e.g.,metrics),Grossly underestimate time
26、 and funding investment required to succeedInsufficient leadership capacity Lacking visible,dedicated leader for the solutions effort Leaders without general management skills and experienceAvoiding tough discussions and inevitable conflicts,Overemphasizing structural versus behavioral changeOver re
27、liance on good intentions without providing the appropriate supporting mechanisms and processes to work across business or product lines,Consultative customer interface,Integrated processes,Clear governance and controls,Top management ownership/commitment,Distinctiveofferings,Build solutions on non-
28、competitive products or services(e.g.,include non-competitive products in a solution just because they carry the client brand name)Failure to add any quantifiable value beyond bundlingOffer product-driven rather than customer-driven solutionsInvest in solutions development without capturing a price
29、premiums to cover the cost,Solution providers who do not carefully consider all five necessary elements are at risk of damaging their existing customer relationships and failing to recover their investment in solutions,8,Solutions definition and key success factorsIdentifying and sizing the opportun
30、ityApproach for defining the organizationImplementation steps,CAPTURING THE SOLUTIONS OPPORTUNITY,9,PROPOSED SCREENING METHODOLOGY FOR IDENTIFYING SOLUTIONS OPPORTUNITIES,Vertical expertiseDistinctive industry knowledgeProprietary access to information,Prioritized prospective solutions,Potential sol
31、ution opportunities,Value creation potentialSizeReplicabilityChannel conflicts,DistinctivenessCompetitive positioning,Organizational fitAbility to align,Relevance of existing assets,Potential solutions opportunities can be surfaced by considering the suppliers unique knowledge and expertise,their wo
32、rld-class products and services,and understanding their customers real needs,Screens must be flexible enough tosurface a stream of new ideas,10,SIZING OF SOLUTIONS POTENTIAL,Surface potential opportunities(e.g.,using the framework from the previous page)Narrow down opportunity set to focus on areas
33、withSignificant revenue potential(e.g.,large revenue opportunity,repeatable)Complex integration needs(e.g.,high likelihood for solutions demand)Identifiable target customersIdentify attractive target markets whichCan be readily identified and sizedThe client can serve with distinctive capabilities(e
34、.g.,unique expertise,product/service portfolio)Include strong existing(or high potential)customer relationships,Surface opportunities and identify potential target markets,Quantify top-down solutions opportunity,Confirm top down estimates with business case,Size external spending and estimate any ad
35、dressable captive portions(e.g.,internal spending on IT processes)Estimate portion of market addressable by solutions(up to 10-15%in“solutions-ready”markets like IT and telecom)Size revenue potential taking into account existing and likely client market share(e.g.,strength of existing relationships
36、and product/service portfolio positioning)Prioritize opportunities based on revenue potential and distinctiveness of offering(e.g.,versus next best alternatives),Develop bottom-up revenue projections over time(solutions businesses often need 5 or more years to see significant profit impact and longe
37、r to reach full scale)Assess system costs and cross-business unit coordination needs by segmenting opportunities which areContained entirely within individual business or product lines(single BU opportunities)Directly related to core activities of 2-3 business lines(potential for joint ventures)Cutt
38、ing across multiple business units but not related to their core activities(potential for new business units)Confirm value proposition with potential customersAssess potential risks and likely competitive response,Once surfaced,potential solutions opportunities should be carefully evaluated along di
39、mensions ranging from market size to distinctiveness versus the next best alternatives,11,RELATIONSHIP BETWEEN SOLUTIONS MARKET AND TOTAL MARKET,*Component specialist price indexed to 100Source:McKinsey pricing practice experience,Depth of integration,High,Low,Degree of packaging,High,Low,Relative p
40、rice index*,Integrator:115,Solutions provider:125-150+,Component specialist:100,Bundler:80-90,Solution providers can command significantly higher margins,.however,solution providers can typically address only 10-15%of the revenue opportunity even in the most“solutions ready”markets,Total market,The
41、addressable market for solutions is typically only 10-15%of the total market even in the most“solutions ready”segments like IT and telecom,Not addressableNo incremental integration value(e.g.,low complexity)Commodity componentsUnwillingness to“outsource”core processes,12,Hardware,3rd party services(
42、external),Packaged software(excluded),IT/datacom market sizing 2001 Percent,*Gartner Group estimates that internal IT spending(captive market)is about 40%of external spending,i.e.about$70 billion for servicesSource:IDC,July 2000;MultiMedia Telecommunications Market Review and Forecast 2000(MMTA),EXA
43、MPLE A:ENTERPRISE IT HARDWARE AND SERVICES MARKET,100%=$500 billion,Total addressable market,Components only market,Solutions addressable market,Competitor market share,Likely client market share,Only 10 to15%of the addressable market typically has solutions potential,Top down revenue potential is t
44、ypically 5%or less of the total addressable market,400,340-360,40-60,30-55,5-20,Captive services*(internal),Potentially interesting for client,13,Administration,Transportation,Third party/contract logistics provider,In-house(captive),Logistics market(80%captive)Percent,Warehousing/administration$Bil
45、lion,EXAMPLE B:LOGISTICS MARKET,*including interest,taxes,obsolescence,depreciation,insurance,excluding warehousingSource:Cass and ProLogis,Armstrong&Associates,100%$920 billion,Warehousing,Carrying cost*,Potentially interesting for client,110,20,95-100,90,10-15,14-14.5,0.5-1,Total addressable marke
46、t,Components only market,Solutions addressable market,Competitor market share,Likely client market share,Captive spending can be a significant portion of the potential,14,OPPORTUNITY,REVENUE AND PROFIT DISTRIBUTION BY DEGREE OF INTEGRATION ACROSS BUSINESSES,Solutions market opportunity,Opportunities
47、 within single business units,$100(index),$5-10,Percent,Opportunities with some cross-BU integration potential,Opportunities requiring cross-BU integration,Likely client revenue,Increasing integration needs across multiple product or business lines almost always increases complexity costs thus decre
48、asing revenue and profit potential,$0.5-1,Potential client profit,Increasing integration across business units increases complexity costs,15,Solutions definition and key success factorsIdentifying and sizing the opportunityApproach for defining the organizationImplementation steps,CAPTURING THE SOLU
49、TIONS OPPORTUNITY,16,DEGREE OF COMMITMENT TO ORGANIZATIONAL TRANSFORMATION,Transform the existing product/service business to focus on solutions selling(e.g.,IBM Global Services example),Prospective solution providers should consider to what degree the opportunity justifies and requires organization
50、al change/transformation to pursue solutions,Option 1:Full commitment to solutions,What degree of investment and organizational change does the solutions opportunity justify?Expected returnsImplementation riskTiming,Option 2:Incremental approach to solutions,Layer on solutions selling capability to
