New Role as Manager of the Customer Experience. Digital Business Models in the Service Sector

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1 Digital Business Models in the Service Sector New Role as Manager of the Customer Experience Service companies must reposition themselves in the digital world. Their central focus needs to be on customer interaction. This requires an adaptation of existing assets and capabilities as well as significant investments in the factors information and digital trust. 16 Detecon Management Report blue 1 / 2013

2 T oday s customers, especially in the service sector, expect flexibility based on customized offers and service delivery, low prices, excellent customer service, and links to their digital world of smartphones and tablets. Consumers want to interact with service providers quickly and easily, and on on their own terms. Digitalization opens up these opportunities and is driving this behavioral change. Observe: competition from the digital world Large traditional service companies typically rely heavily on pre-defined processes for their operations. They frequently struggle to meet these new customer demands. The retail sector has seen once illustrious names such as Sears in the US or Neckermann and Quelle in Germany struggle. They were attacked and pushed away by new players such as Amazon or Zalando. New providers in the financial services sector such as PayPal or Lending Club have also proven to be more in tune with customers who are networked with one another, who are part of the always on society using mobile end devices for their financial transactions, and who move back and forth between online and offline channels without the slightest hesitation. There is a very real danger for many traditional financial service providers that their reactions to the new customer demands will be inadequate or too late. Moreover, many traditional service companies are frequently characterized by large infrastructures. Utilities and telecommunications companies as well as banks and retailers with a large network of branch offices have their business operations tied to broadly distributed physical assets that tie up capital. Compared to the new, largely Internet-based companies, they find themselves under increasing pressure to cut costs and find the financing they need. As a consequence of all of the factors discussed, the service sector is subject to an especially strong impact from the rapid development of information and communications technologies (ICT), 17 Detecon Management Report blue 1 / 2013

3 making it a pioneer for digital transformation. Nowadays, ICT is no longer restricted to enabling efficient performance (production), but has become a decisive element in the perception of the service offering and the customer interaction. Leading Digital is not an option in the service industry it is an absolute business necessity to gain customers attention and win their loyalty. New, agile business models can appear at any time and pose a serious threat to the existence of supposedly firmly established players. Rethinking: new definitions of business models and service portfolios From these trends we expect significant changes in future market roles and the factors of future value creation. Strictly vertical business models will lose ground while horizontal market roles will develop. Specifically, such roles will include the manager of the customer interface, who understands the customers language, develops a solid foundation of trust with customers, and integrates them into the service delivery; the platform provider, who assumes the role of coordinator in the value creation network; and the infrastructure operator, who integrates the industry infrastructure and the ICT infrastructure so that the core services can be made available to other providers. In this picture, stores and offices in the retail sector, logistics networks in trade, or the energy grids and railroad networks are typical examples of what we call industry infrastructure. Because of the assets they hold and the resulting intertia, traditional companies can quickly find themselves pushed into the role of the industry infrastructure operator. It is unlikely that this part of value creation will be able to offer significant future growth potential and it is characterized by high pressure to raise efficiency and strong scale effects. Companies that want to participate in growth markes will have to look closely at where future value will be generated in their markets and what additional roles they want and are able to assume. There are essentially two directions in which companies can move if they want to break out of standard business, i.e., the role of the industry infrastructure operator, and want to keep pace with market Future Horizontal Market Roles Factors of Future Value Creation Manager of the customer interface Information Trust Platform operator Infrastructure operator Industry infrastructure ICT infrastructure Transaction Source: Detecon 18 Detecon Management Report blue 1 / 2013

4 developments. One is for service companies to develop into a market role which takes care of the operation of a platform (see also the article Good Connections about the energy industry on page 38); the other is for them to strive to fill the role of manager of the customer interface. Understand: new competencies for interacting with customers If we observe the market developments and consider the characteristics of successful (new) companies in the service sector, we determine that the role of manager of the customer interface is characterized by three major success factors: (1) Transaction: This factor represents the starting position for most of the traditional companies in the service sector. It embodies the structure of the core business of today which is based both on industry infrastructure (physical assets) and on process competence. The key task for a manager of the customer interface is to change from a supply-oriented to a demand- or customer-oriented business logic. Using comprehensive knowledge of customer needs, they have to shape while constantly reinventing themselves the customer experience and orchestrate infrastructure components from which innovative offers for customers are developed. A manager of the customer interface pays especially close attention to a simple usability of the offered services and the integration of customers into the creation of the service, e.g., through mass customization, customer self-care, and prosumer offers. (2) Information: This is a factor steadily gaining in significance. Information is the currency of the digital world. As a factor in value creation and competition it encompasses the utilization and analysis of internal and external information sources for the enrichment of a company s service portfolio. This covers both the capability of carrying out data analyses to enhance business operations typically the domain of business intelligence and combining existing products and services with added-value information components. Examples range from QR codes and mobile apps that provide information to consumers in stores or travelers in trains to financial market data compiled out of transaction patterns. (3) Trust: Trust has to be established before customers before make any decisions about buying or entering into contractual relationships. Trust can be placed directly in the company a core element of every brand strategy or, in the age of social media, generated via communities. Banks as an example have suffered an enormous loss of general trust since the start of the financial crisis. Trust derived from networks which companies either shape or which they can join as members is less vulnerable. This type of trust is exemplified in the relationships between buyers and sellers on Amazon or ebay or on networks such as Facebook or Twitter where companies and customers can enter into a dialog with each other. The three factors discussed combine to create a magic triangle in which companies must position themselves in the digital world. As of today, only a very few companies have succeeded in addressing even two of these factors, and finding all three of them in one enterprise is rare indeed. Amazon is one example of a company which manages and exploits all three factors: Transaction: careful management of customer relationships and direct selling of goods, Information: unambiguous identification of items by the use of the Amazon ID and the provision and processing of masses of additional information about the products in the form of pictures and descriptions, Trust: provision of personalized recommendations reviews plus opening up its market places for 3rd-party sellers. Service companies wanting to take advantage of the success factors must build up new competencies and modify their business models. Leading Digital refers on the one hand to the revaluation of existing assets and transaction competence, and on the other hand to massive investments in the factors information and digital trust. 19 Detecon Management Report blue 1 / 2013

5 Learning: building up competencies In the following, we make use of a practical example to illustrate the necessary modifications and the required competencies which enable companies to master the digital transformation and to establish itself as manager of the customer interface. We see a trend from transaction-oriented to service-oriented business models within the retailing sector, especially driven by e-commerce. One example is subscription commerce, which uses flat pricing models for regularly purchased consumables. Amazon offers flat rate models of this type for diapers, shaving creams, and similar products. Retailers use this new business model to develop longer-lasting business relationships and hence a greater customer loyalty. The benefit is a constant revenue flow and an increase in the share of wallet for these customers. Moreover, cross-selling potential is created by a more precise knowledge of customer needs. What are the competencies that a retailer has to build up for successfully establishing such a new business model? We illustrate the required competencies along the three dimensions of transaction, information, and trust: (1) Transaction: Traditional retail business models focus on the one-time sale of products to a anonymous customer. They were strongly by a supply side logic. In contrast, subscription commerce is not possible without having the capability of managing long-lasting contractual relationships. Here, the focus is set towards the customer. In addition to the relevant process and system requirements that are needed to handle long-term business relationships such as billing relationships, master data and creditor data management, automatic triggering of processes and payment transactions CRM and multi-channel competencies are particularly new and critical for success. (2) Information: Fundamental elements of a service portfolio which takes into account the individual situation of each customer such as consumption forecasts or changes in size require intelligent data management and analysis. Our example of the diaper flat rate focuses on young families as target customers. The offered products are differentiated according to socio-economic criteria. Besides the basic CRM, an excellent knowledge basis regarding the customers and their (family!) needs the key word here is customer profiles is essential. This is the foundation for a competent hotline, dissemination of regular information to the customer, digital shopping lists and receipts - including mobile apps, and overview of products and deliveries. The data obtained here can be evaluated and utilized for customer value analyses, cross-selling and upselling campaigns, as well as for sophisticated consumption forecasts. (3) Trust: In traditional transaction-oriented business models the business relationship is revived at every new transaction and the customers trust is placed primarily in the quality of the product. In contrast, subscription commerce aims at long-lasting relationships with consumers. A subscription model requires a large amount of personal data that needs to be collected and analysed to generate a customer benefit. Hence, customers have to reveal far more about themselves than they would in common purchasing situations. Therefore, the business model requires greater trust of the customers in the retail company. Customers open themselves up to retailers consequently they must be sure that the product delivery stays attractive in terms of pricing irrespective from changes in his individual situation (phase of life). Consumers no longer need to worry about satisfying a certain need of theirs; they rely on the retailer to take care of their individual needs. Such a business relationship that is built on trust puts greater demands on the retailer with regards of to customer care, evolution of the product line, and attractiveness of the price of the products. To keep a service customer-friendly, a number of partners such as delivery services must be orchestrated. Integration has to be ensured on a technological, organizational, and commercial level, e.g., incentive systems for the partners, interfaces for data exchange. The retailer s accountability is not limited to the performance of its service, but extends in particular to the quality of the performance of its partners. Consequently, the retailer has to establish a rigorous quality management for his value creation network. 20 Detecon Management Report blue 1 / 2013

6 Act: what must be done, and where do you start? The transformation of the markets and with it of the traditional business models in the service sector has already begun. Even though it is not possible from today s perspective to obtain a full overview of where this transformation will ultimately lead, the development cannot be stopped. Traditional Workshop on Identifying New Business Fields We support companies during the digital transformation of their core business by working out specific business model frameworks for each particular sector. Within the scope of workshops we can offer to our clients: Stimuli: best practices from other industries in different maturity phases of the digital transformation Modeling and visualization: team-oriented creation of new digital business models with interactive and customer-centric methods like design thinking and the business model canvas Evaluation: joint assessment of the market potential of the new business models Feasibility: review of the new business models to determine their feasibility Needs for action: identification of requirements in relation to the new value generation factors Implementation approaches: timeline showing the initial concrete steps service companies will need to take decisive actions to influence its direction and to occupy future-proof positions on these evolving markets at an early stage. This will require a rethinking of most service companies business model. Without that they will not succeed in adapting to the changes in customer demands and the rising pressures on costs and financing for existing assets on the one hand and utilizing the new possibilities offered by technology on the other hand. Decision-makers in service companies must therefore find answers to the following key questions if they are to determine the maturity of their own business model and identify the relevant needs for action: To what extent has digital transformation commenced on the markets relevant for my company? Where does my company want to position itself in the newly evolving market environment: away from the role of the business operator of infrastructure and toward the role of the dynamic manager of the customer interface? How strong is my company in the dimensions which will presumably define the role of manager of the customer interface: transaction, information, and trust? How can my company enrich its existing infrastructure and customer base with the factors of information and trust so that new business models and service portfolios become possible? What role will the ICT infrastructure play for my future business models? How do I connect the two infrastructure areas? Dr. Volker Rieger, Managing Partner, advises clients in the energy and telecommunications sectors, aiding them in the development of new business models in the context of the digital transformation. 21 Detecon Management Report blue 1 / 2013