Impact of Services on Project Business

Transcription

1 1(19) Research paper for IRNOP VIII Research Conference 2007, Brighton, UK Paper title: Impact of Services on Project Business Authors: Artto, Karlos, Prof. (corresponding author) Helsinki University of Technology Industrial Management P.O. BOX 5500, FI HUT, Finland Tel: karlos.artto@hut.fi Wikström Kim, Prof. Åbo Akademi University & PBI Research Institute for Project-Based Industry Industrial Management kim.wikstrom@abo.fi Hellström, Magnus, Dr. (Tech.) PBI Research Institute for Project-Based Industry & Åbo Akademi University magnus.hellstrom@abo.fi Kujala, Jaakko, Dr. (Tech.) Helsinki University of Technology BIT Research Centre jaakko.kujala@hut.fi

2 2(19) Impact of Services on Project Business Short abstract Many companies in project business are expanding their offering with services. Despite much writing in the field of services, the connection between project business and services remains unclear. Some authors seem to hold that services are in the core of business. Others propose that services are extensions of products. A more recent view points at the total solution to the customer s problem that an integrated product-service delivery can offer. In this paper the topic is approached from a project business viewpoint. In project business, services are produced before, during and after the implementation of projects. In a project supplier firm, at any point of time there are multiple simultaneous projects and services, each in their individual different phases. This poses an interesting challenge of organizing for the whole business while projects and services are in interplay in settings where services are both inherent and external to project contents. Understanding the impact of services on the performance and competitiveness of project business is important. This paper explores what kind of impact services have on the performance of project business. The theme is investigated through a cases study of five project suppliers. Based on the conceptual analysis of existing literature, we created a framework that addressed a solution life time view, where the solution includes a core project delivery and related services. The empirical results show a wealth of different service offerings that are implemented in various phases of solution life time. These service offerings were categorized also in terms of five impact types, which shows the primary business interests of offering these services. The five impact types, derived from our empirical analysis, are: customer entry, customer value, competitive advantage, delivery efficiency, and service business. Finally, we concluded several distinctive results that related to the following areas: the firms focus on equipment delivery and role of product technology basis, versatile role and logics of consulting types of services in solution providing, the importance and logics of maintenance type of services in business, different alternative entry points to customer s business, and various attitudes and business logics toward self-delivered systems and installed base originating from competitors instalments. The paper suggests further research on specific contents related to the theme of project and service business. Keywords: Project business, services, systems integration 1. Introduction There is an increasing trend for companies with a base in manufacturing and product sales to move into service business by adding, combining or integrating elements traditionally labelled services into their product deliveries. Scholars have already long been witnessing and supporting this tendency (e.g. Levitt, 1972; Gummesson, 1978; Normann, 1982; Grönroos, 2000). Among the benefits continuous streams of revenue, higher profits and new possibilities to differentiate are often mentioned (Quinn, Doorley and Paquette, 1990; Wise and Baumgartner, 1999). These benefits are in many cases true and quite clear, especially in cases when standardised products are contrasted with services in the form of after sales. However, in the case of project business, where the products often can be described as complex products and systems (Hobday, 1998) the division between products, services and projects deserves closer examination. One key issue is for instance how to align service and project processes with the overall business processes in a company (Gann and Salter, 2000). During the past decade systems integration - which can be located in the twilight between products and services (Pavitt, 2003) - has been articulated ever more clearly as a key organisational element in project business (Hobday, Davies and Prencipe, 2005). Davies (2004) further describes what he calls integrated solutions as one innovative, state of the art strategy where system products and services are combined into vast and long-lasting deliverables from a supplier to its customer. Other scholars have used terms like service-enhanced (Gann and Salter, 2000)

3 3(19) and service-led (Alderman, Ivory, McLoughlin and Vaughan, 2005) to denote business cases where big projects are combined with services, especially during the use phase of the delivered products. Today there is a wealth of research on services, however mainly directed at markets for fairly standardised goods. From a project business point of view the challenge is on how to integrate services into project business of a project supplier firm, which has constant flow of simultaneous projects in its production line (Artto et al. 1998). We claim that there is a lack of research regarding services as part of project business. In this paper we consider and analyse the impact and importance of services for project supplier firms. The research question addressed in this paper is: What is the impact of services on the performance of project business? The perspective of this paper is to adopt a project business view as a point of departure, and to develop understanding of how services would contribute to project business, or how services could complement project business in a beneficial manner. The research question is addressed through a cases study of companies that supply projects to their customers. The cases show how different industrial system suppliers have integrated services into their business models. This way, the study aims to reflect the impact of services on companies business performance. 2. Theoretical and conceptual background 2.1 A summary of relevant literature for the study The strategy of selecting the literature basis and discourses for this research are the following. The research uses existing literature that contributes to the understanding of project business and how services relate to it. The recent project business literature (Cova and Holstius, 1993; Artto et al. 1998; Brady and Davies, 2004; Artto and Wikström, 2005; Davies and Hobday, 2005; Whitley, 2006; Artto, Martinsuo and Kujala, 2006), systems integration literature (Prencipe, Hobday and Davies, 2003; Hobday et al., 2005) and the relevant service literature (Quinn et al., 1990; Frambach, Wels-Lips and Gündlach, 1997; Wise and Baumgartner, 1998; Foote et al., 2001; Grönroos, 2000; Mathieu, 2001; Oliva and Kallenberg, 2003) are selected as a point of departure, to build an understanding of what project business is and how at least some service contents can be considered to be included in a project s and/or project supplier firm s delivery scope. In this respect, we interpret project business literature widely, and refer also to project marketing and systems business (Mattson, 1973; Günter and Bonaccorsi, 1996; Cova, Ghauri and Salle, 2002) as sources that discuss the researched phenomenon. This discussion is complemented by literatures on industrial and professional services that build on understanding of services may relate to project business. All these literatures are used to understand both strategic business model related aspects and organizational issues and managerial approaches of how services relate to project business, i.e., how services may contribute to or impede project business. From the point of view of a project supplier firm participating in projects for its business purposes, we adopt the project business definition from Artto and Wikström (2005): Project business is the part of business that relates directly or indirectly to projects, with a purpose to achieve objectives of a firm or several firms. These firms may engage in several sequential of parallel projects through different delivery scopes (Cova et al., 2002): part deliveries, subproject deliveries, packaged complete subsystem deliveries, and turnkey deliveries of complete final products with their tested and assured functionalities for required performance. Services can be integrated into a project delivery before, during actual delivery and after the delivery. In order to answer the research question empirically, we chose to focus on business models in our interviews, and the role of projects and services within the business models in case companies. For this purpose, we used the literature on business models to build a relevant perspective for answering our research question, and accordingly, to plan for the questions in our semi-structured interviews. There is a wealth of recent literature on business models, from which we preferred to use Stewart and Zhao, 2000; Alt, 2001; Linder, and Cantrell, 2001; Chesbrough and Rosenbloom, 2002; Chesbrough, 2003; Hedman and Kalling, 2003; Pateli and Giaglis, 2004; Morris et al. 2005; Osterwalder et al. 2005: Shafer et al. 2005; Tikkanen et al that provided a good content and perspective to our interviews and empirical study. Even though no generally accepted definition of a business model has emerged, most scholars refer to

4 4(19) business models as a statement of how the company makes money (Stewart and Zhao, 2000) or how technological inputs are transformed into economic outputs (Chesbrough and Rosenbloom, 2002; Chesbrough, 2003). Based on their comprehensive review of business model literature, Morris et al. (2005) identified three general categories of business model definitions: strategic, operational, and economic. A business model with strategic focus is defined in terms of the logic of profit generation. Such a business model identifies revenue sources, pricing methodologies, cost structures, margins, and expected volumes. An operationally focused business model focuses on the internal processes that enable the firm to create value, such as production or service delivery methods, administrative processes, resource flows, knowledge management, and logistical streams. To further strengthen the theoretical foundations of the paper we also relate to literature within the field of value creation to find sources for systematically analysing various activities creating value in different contexts and to help the understanding and argumentation of what is the impact from services on the traditional value-creating activities. In this sense we adopt a view covering also the customers value creation mechanisms This occurs as services has to integrate into various types of setups and a lacking ability to understand these often unique needs destroys the possibility to be customer-oriented. This would imply that the service would not be seen as a value driver. Another important aspect is when introducing a service that is cannibalising on some other specific value driver and thereby changing the nature of the offering and the impact it has on the offering and the customer relationship. This has also been discussed by Matthyssens and Vandempt (2002). They also discuss the various emphases on adding value through various service innovations that can either be focusing on technology or processes. Literature addressing value creation also gives perspectives on various phases of the project business as activities before project delivery, during project delivery and after project delivery. Another important literature stream is within strategy where the concepts of business ideas and thereto related activity systems and similar categorisations and illustrations [as for example described by Porter (1996) and Hamel (1994)] can help us understand the strategic dimension of the impact of services on project business. Unique activities form the strategy and also the way activities are put together. Services can be seen as a set of activities that are brought into project business and thereby impacting on strategy. This stream of literature concentrates on how single firms can create distinctive capabilities (Normann, 2001) and thereby differentiate. This direction can also be seen from the definition of service given by Frambach et al (1997) as: the set of all related activities a supplier can supplement his product offering with, in order to differentiate his offering relative to the competitors as perceived by (potential) customers and distributors. Frambach et al:s definition links services to the core product or project. Services with no linkages to the core product or project are not necessarily included in this definition. This view is also supported by other authors arguing that a separate service strategy can not exist in isolation without receiving support or supporting the firm strategy. We have understood the concept of offering as including or synonym to the concepts of valuecreation mechanisms and also see the linkage to activity systems. When considering a certain type of activity systems within a firm or a network of firms we are able to see if there are dependencies between separate services and the other activities. In the interviews we have also paid attention to the business environment where the activities are done, what is the pace of technology development, competition, markets and the tradition so that we also thereby can understand the impact of services in various unique settings. Organisational structures and organisational behaviour are interesting for understanding the impact of services on project business. The way of organizing deliveries in the form of projects is an important part of the overall organizational setting. Services are delivered by primary actions of organisations and thereby the organisational setup is relevant. The organisational perspectives can also be seen as part of the business model and thereby it is included into our theoretical and empirical frames. Anyhow we recognize that further work can be done in analysing the impact of services from an organisational perspective. The above mentioned distinctive capability can be seen as part of an organisational view. Much of our findings relate to how people act within and between organisations which is a specific characteristic for project business. Services are seen as drivers for increasing flexibility and adaption capability for firms traditionally delivering single goods. A central part of delivering services relates to relationships, the quantum and the quality as a base for delivering services. For example, Ulaga (2003) has identified eight relationship value drivers: product quality, delivery, time-to-market, direct product costs (price), service support, supplier know-how, personal interaction and process cost. This view represents an interesting aspect of the impact of services on project business where the quality of relationships and there by the value produced is strongly dependent on the existing offering.

5 5(19) 2.2 The relation between projects and services in business: a conceptual view From the literature referenced above, it is clear that project business can be approached from both manufacturing and services perspectives. In fact, a project as such can be considered a service in the sense that it aims to fulfil the need of a specific customer (but not a specific need of any customer, which makes the project s scope to be different from a fully pre-defined product or service offered to open markets). Related to this logic, the supply chain management literature recognizes value offering point (VOP) in the customer s demand chain as a point where a supplier fulfills the customer s demand with its offering (Holmström et al., 1999). In supplier s side, order penetration point (OPP) is defined as a point in the supplier s delivery process where a product becomes earmarked for a particular customer (Sharman, 1984), or a the point where a customer demand is allocated to the product (Hoover et al., 2001). The literature on project business contains a large number of different frameworks and models for analysing projects. For the purposes of this paper we have chosen a fairly simple but appropriate and robust framework, mainly derived from Artto et al Figure 1 is based on this framework and illustrates the formation of a supplier firm s delivery scope ( a, a+, a1 and a2 ). The project delivery scope is depicted by a coloured area. The delivery scope consists of the delivery scope of an individual project ( a and a+ ), and of delivery scopes before ( a1 ) and after ( a2 ) the project. The project delivery scope may include products, systems, services, or integrated solutions as integrated entities of products, systems and services. The figure also illustrates a maximum scope of hypothetical integrated solution or delivery scope that the supplier could engage to. This maximum hypothetical scope of the integrated solution is shown by a larger area in the figure. However, as this hypothetical integrated solution includes an owner s whole life view of the solution, the project supplier cannot achieve the hypothetical maximum scope only by expanding its scope of project delivery, but for the maximum delivery the supplier would need to deliver also services that fall outside the time span of the temporary delivery project. Maximum hypothetical scope before the project Expanded service delivery a+ during the project Maximum hypothetical scope during the project Maximum hypothetical scope after the project System /solution a Service a1 delive - red before the project (expanded service delivery by project firm X) Project start Scope of project delivery a (system /solution delivery ) by project firm X Project close -out Service a2 delivered after the project (expanded service delivery by project firm X) Time Pre-project phase Project phase Post-project phase Figure 1. Solution life time view: scope of single core project delivery and related services Figure 1 distinguishes between services delivered before, during, and after the project. The project supplier may provide many of these services either as included in the project delivery or to be delivered separately before or after the project. This way, the owner may use the project supplier firm or its competitors, or even a selected group of specialized project/service suppliers for service deliveries during the solution s life time (see Figure 1 for the illustration of the whole life view of the solution). However, it can also be the case that the owner does not always use external suppliers to help with specific parts of the

6 6(19) solution but conducts many service activities itself during the life time of the system/solution. This may be due to the owner s view that certain services related to the overall solution, for example operation of a production facility, are part of owner s core competence that contributes to its distinctive competitive advantage. 3. The research process For the empirical part of the study five companies were chosen. The choice of case companies was mainly based on three criteria. First, the companies needed to qualify as industrial project and service suppliers. Second, we preferred to look at international and industry-leading companies. Finally we turned to companies that could guarantee us sufficient access in order to obtain as rich data as possible. Table 1 provides a summary of some key characteristics of the case companies. The main data was gathered through semi-structured interviews of altogether 15 informants in the five case companies. The informants affiliations included President, Senior Vice President, Vice President, Director, and Director of Business development. The profile of the interviewees affiliations reflect the fact that we seeked to interview individuals both at top line positions and in business development positions in those companies. This occurred as the general focus of our data gathering was on business models of the companies and how projects and services relate to them, and we considered that the selected informants with such affiliation profiles were the most knowledgeable individuals in their companies in this focus area of business contents and business models. To a lesser extent, mainly for general information, we also used other data sources, such as the companies web sites or documents and presentations that were sent to us before or sometimes even after the interviews. In some cases we were also able to make use of data that we have gathered in other research projects within the same case companies. 3.1 The interview process Most of the interviews lasted for the two hours that they were scheduled for. In some cases the interviews took a shorter time, like one-and-a-half hours or so. The interviewing responsibilities were distributed among the authors of this paper. A minimum of two authors were always present in all interviews and the combination authors were varied between companies and interviews. These principles were to ensure that understanding, insight and sharing of observations concerning each case company was widely spread among the authors. For the content of the interviews we followed a common protocol that was developed before the first interview and that was only slightly adjusted through the course of the interviews. In the semi-structured interviews, we asked about different prevalent project types and service types that the interviewees recognized in the company s business. Furthermore, we asked the interviewee to describe the company s business model. The business model was described to include/address/take into account among others the following issues: offerings, value proposition to customers, value creation logic (customers value), revenue generation logic, customer behaviour, competition, distinctive competencies and resources that contribute to competitive advantage, and use of external resources (suppliers). The interviewee was asked to separately describe the typical business model that used in the industry that the company belongs to, and separately the specific business model of the case company itself. We also asked about the relationship of the project and service types to the business model, and the company strategy. Finally, we asked about which services the company provides before, during and after the project, and why such services are provided. With this question, we had Figure 1 and the related discussion in section 2.2 in mind, even though the interviewee was not exposed to the figure or the discussion in that section. 3.2 The process of analysis and abstraction The interviews were recorded and transcribed: with an average of circa 20-page transcription per interview, the total number of transcribed pages from interviews was some 300 pages in total. 5-page summaries on the important data content were then written for each interview, by having a principle in place where the two authors present in that specific interview were jointly creating the interview-specific summary document. After creating the interview-specific documents, company specific analyses about the data and observations were made. After the company-specific analyses, the overall analysis with cross-case

7 7(19) comparisons was made among all authors. The process, which has been iterative in seeking an appropriate methodological approach and in filtering appropriate content and observations, has included several joint meetings and workshops among the authors of this paper. The terminology related to projects and services varied among the suppliers. Some suppliers preferred to emphasize the project aspect in the organizational setting by using terms like project unit for units responsible of major system deliveries with equipment, software and services. Some other suppliers preferred to consider such major projects as services. This was reflected in the organizational setting in a way that an organizational entity called service unit was responsible for delivering major projects to the customer, among other services. Each firm had a significant know-how and technological capability concerning a technical system. This know-how and capability is to a great extent based on what we call here as core content of delivery (see Table 1). Respectively, the scope of a core project shown in Table 1 reflects this core content. The core project definitions of the five case companies A, B, C, D, and E in Table 1 are corresponding entities to the scope of project delivery a in Figure 1. However, it is important to recognize that the concepts core content of delivery or core project do not necessarily refer to the importance of these issues in terms of business volume or revenue. It may, for instance, be that delivering core projects provides the company with a solid technological base and credibility in the market, but using its capabilities and position constructed thereof, the company has decided to put a great deal of emphasis on providing maintenance services for the installed base, which is itself a strong and profitable business. Furthermore, concerning the installed base, the company may not limit its maintenance services only to the installed base of its own self-delivered systems, but the maintenance services are provided extensively also to other vendors installed base. Company B is a good example of this kind of business logic. These considerations lead us to the most interesting question of where the entry points to customers are: to which extent core projects are entry points that enable selling and delivering of maintenance services, and to which extent maintenance services are the entry point that lead to delivering of core project scopes that may take the form of customer s new greenfield investments, extensions, or modernizations.

8 8(19) Core content of delivery Electric power and propulsion systems Elevators Ship machinery, propulsion and manoeuvring systems Telecom networks Valves & flow control systems 5-10 % 2-4 % % % 2-4 % Project buyers Shipbuilding companies Construction companies Shipbuilding companies Telecom operators Plant/facility construction companies Investors/users Ship owners Real estate owners/operators Ship owners Telecom operators Process plant owners Core project Propulsion and/or power equipment delivery Complete installed and functional elevator Ship engine and related power equipment delivery, propulsion system delivery, automation system delivery Complete installed and functional telecom network system, network implementation (NI) Valves, their actuators and related control system delivery N/A N/A N/A % N/A Table 1. Characteristics of the five case companies and their core deliveries Characteristic A B C D E The share of the project delivery in buyer's main project/investment The share of core project's cost of total system life cycle cost

9 9(19) 4. Impact mechanisms of services on business performance When comparing our interviews with the framework depicted in Figure 1 we can already regard a project itself as containing services (e.g. engineering and/or construction). The interviews furthermore show that there are several opportunities for a project supplier firm to enlarge its scope of supply. First, it can extend the scope of the product system under provision, e.g. by moving from the role of a component supplier to a system supplier. The added service in this regard is that of procurement, systems engineering and integration. Second, it can extend the scope of services provided during the project, e.g. by offering to carry a combined engineering and construction responsibility (so called design-build projects ). Third, it can move up-front into the customer s decision process by providing business and technical consultancy services and financing services. Fourth, it can provide operations-related services to support the use of the project outcome. Many case companies regard themselves as solution providers. In order to map the provided services as part of the overall solution, our solution life time categorization (before, during and after the core project, as illustrated in Figure 1) will further support us in assessing the specific impact of these services on project business as a whole. Through our analysis of the five case firms, we identified altogether five different impact types that explain the impact of services on the performance of project business. These impact types are: 1) customer entry 2) customer value 3) competitive advantage 4) delivery efficiency 5) service business Customer entry refers to the desired effect of the service representing an entry point to a customer, for additional services or projects in the future. Customer value refers to the effect of creating additional value to the customer with the service, which obviously has a favourable impact on the supplier firm s margins and profitability. Competitive advantage means increase of own offering s competitiveness by making own offering more attractive than competitors offerings for the customer. Delivery efficiency refers to the service s impact of making delivery activities more lean and cost-effective. Service business refers to the fact that the delivered service itself is justified as part of profitable service business. Table 2 summarizes the observations from the empirical study concerning the impact that services have on business performance. In the table, our observations of such impacts are categorized into the five impact types described above. Observations concerning all case companies A, B, C, D, and E are merged into this summary table, but observations concerning specific companies are not shown separately, partly due to reasons of anonymity. In the table, the impact of services on project business is categorized by the timing of the service implementation in the solution life time (before, during, or after the project, see Figure 1) and by the impact type. However, it is important to note that although the observations of services and their impacts in Table 2 are arranged to occur before, during, or after the project, with the term project we refer to what we called a core project above. However, referring to the project in Table 2 may also mean that such a core project may even be delivered by a competitor firm. This way, the competitor has built the installed base, and we then can interpret the table in the following way. The supplier firm can offer and deliver its after-project services after this competitor s project, to e.g. provide maintenance or operations support services for this competitor s installed base. Thus, the reference to the timing of the service delivery in relation to the project in Table 2 does not refer to any specific individual project but rather to any project (or many projects that occur simultaneously all the time) in the project business context of the project supplier firm.

10 10(19) 1) customer entry Consulting is a growth engine that leads to bigger and bigger projects or service deliveries. For this reason, consulting is often delivered also free-of-charge (consultative selling). Conceptual design and feasibility studies help the customer to design the solution and the supplier firm to simultaneously develop its project offering to match customer s needs. Joint development and innovation activities support on-going discussion, mutual target definition, and furthermore enhances trust. Configuration tools and methods for creating specifications can help the customer to plan, visualise and consider many alternatives at an early stage, and to match the supplier firm s offering to these alternatives. Consulting, consultative selling, conceptual design and feasibility studies, joint development and innovation activities, configuration tools and methods for creating specifications 2) customer value Engineering design and systems integration is used for novel ideas and support of customer s investment by creating technology advances. Engineering design, systems integration Before the project 3) competitive advantage Consulting, conceptual design, and systems integration services are used to participate to customer s request for bid preparation directly or indirectly, and to simultaneously ensure the fit between customer s request and the supplier firm s offering. Consulting, conceptual design, systems integration 4) delivery efficiency Supported even web-based and free-of-charge project/product configurators set for customer s use ensure such project scope definitions that enable smooth and efficient delivery. Customer s training about projects and their potential product choices are used for same purpose. 5) service business Maintenance contract often leads to other kinds of service and project deliveries; for example, a long term maintenance or operations support relationship with the customer provides a good opportunity for the supplier to bid for or deliver another core project (modernization, extension, or even a new green field system/solution). Project/product configurator, training Maintenance, operations support Table 2. Observations of impacts of services on project business (Part 1 of the table: before the project ) Time frame Impact type Service s impact on project business Observed service offering

11 11(19) 1) customer entry The core project delivery itself often serves as a major point of entry to the engagement to the customer s business. By delivery process planning and continuously adapting delivery logic, the supplier can influence when such entries are made. However, when the major delivery project is being executed, there are only seldom possibilities to build additional add-on service deliveries that would be delivered during the project on the top of the actual project delivery. This occurs as the customer s interest is often to concentrate on the execution of the major investment and not to buy additional e.g. optimization or related services until the major delivery project is completed. Delivery process planning 2) customer value With some companies, core project is only sold with training included; this guarantees customer s appropriate use of the systems, and customer s value accordingly. Project management and systems integration are seen often as essential parts of the core project delivery that add value to the customer. Engineering and design are typical contents included in many project deliveries to design the delivery to match customer s needs. Training, project management, systems integration, engineering and design During the project 3) competitive advantage In many companies, the core project itself is a service that serves as a means to have related equipment sold. In this respect, the capability to adapt by flexibility in product structure is seen as important competitive factor. Core project and inherent service offering 4) delivery efficiency Experience in demanding supply chains and supply chain management, including handling of custom, permit, and classification society issues, guarantees smooth delivery, capabilities to handle uncertainty and improve the delivery logic continuously. Procurement, global network of available resources and commissioning and handing over services are important. 5) service business Core project is a means to build installed base, which even may include proprietary components or software that guarantee supplier s maintenance/update activities after the project. The installed base is then a platform for other kinds of services, like maintenance. Therefore, a core project is an entry point to the customer for selling other services in the future. Build-Operate-Transfer (BOT) represents a service package with supplier s substantial responsibility of customer s operations. Supply chain management, procurement, commissioning and handing over Core project and inherent service offering, Build-Operate-Transfer (BOT) Table 2. Observations of impacts of services on project business (Part 2 of the table: during the project ) Time frame Impact type Service s impact on project business Observed service offering

12 12(19) Table 2. Observations of impacts of services on project business (Part 3 of the table: after the project ) Time frame Impact type Service s impact on project business Observed service offering

13 13(19) 1) customer entry Consulting, optimization of the system, and even simple field maintenance services often lead to larger delivery scopes. Training in an early operations phase can support extension of collaboration. 2) customer value Maintenance or operations support relationship with the customer enables often technical systems integration and optimization services that often lead to larger projects, like upgrades, modernizations or extensions. Maintenance is provided with simple service availability guarantees or spare parts inventory management schemes. Also fixed-price operations support with system operability and system uptime/downtime (availability/reliability) guarantees are provided. In such cases the supplier carries at least a part of customer s production loss risk. The supplier can reduce its risk by independently optimizing the operations by adding preventive maintenance activities and/or by using equipment and systems of higher quality assuring the availability/reliability. Outsourcing services represent supplier firm s long-term investment (with financing) and supplier s substantial responsibility of customer s operations. Asset sharing with the customer with new investment projects and their operation is conducted with revenue sharing types of contracts; this means supplier s definitive investments and financing. Arranged bank loans represent some minor financing arrangements with small customers. Localized operations support/service centres and open web-based and real-time information sharing about the status of customer s system are used to enhance customer s value. In some cases, local selfgoverned service centers with close and even sometimes personalized and intimate customer contacting are considered as major value increasing vehicles. 3) competitive advantage Outsourcing and asset sharing require considerable investments and responsibilities for the supplier firm, which means that the supplier shifts its business towards specializing in customer s operations (this may even require that the supplier acquires assets that traditionally belong to the customer s side); this is not always desirable to the supplier, but the supplier s primary motivation for such services often is based on maintaining the competitive advantage and long-term customer relationship. This way, outsourcing may even cannibalize ongoing more profitable maintenance/operations support with the customer, but despite this, supplier is willing to take larger responsibilities with even lower margins due to the interest of creating a closer and more stable customer relationship due to the highly competitive situation in the market. 4) delivery efficiency Centralized (but to some extent localized) operations service centres are used to achieve favourable economies of scale effects while providing maintenance and operations support services to several customers. Centralization of maintenance and operations support, and advanced information systems are used for monitoring, analyzing, and distant care activities. The centralization helps to achieve economies of scale effects, and the information technology helps to avoid using manhours of human workforce in too laborious way. Also shaping of customer base by acquiring installed base with high local density enables combining of field maintenance of several sets of field equipment in same technician s traveling schemes. 5) service business Consulting is a profitable business itself; technical consulting often relates to systems optimization and systems integration, which often leads to larger deliveries. Training may be a profitable business itself. Maintenance, operations support, outsourcing, and asset sharing are profitable service businesses themselves. Consulting, optimization, maintenance, training Systems integration, optimization, upgrades, modernizations, extensions, maintenance, operations support, outsourcing, asset sharing, financing, localized operations support/service centres, open web-based and realtime information sharing Outsourcing, asset sharing Centralized operations service centres, maintenance, operations support Consulting, systems optimization, systems integration, training, maintenance, operations support, outsourcing, asset sharing After the project

14 14(19) 5. Service types and their business impacts 5.1 Observed service types Services are positioned in Table 2 as implemented before, during, or after a delivery project that is a core project or equivalent, conducted by the project supplier company or its competitor. From Table 2 we can conclude that there is a wealth of different service offerings that are implemented in various phases of solution life time. The observed service types are: consulting, consultative selling, conceptual design and feasibility studies, joint development and innovation activities, configuration tools and methods for creating specifications, engineering design, systems integration, project/product configurator, delivery process planning, training, project management, supply chain management, procurement, commissioning and handing over, Build-Operate-Transfer (BOT), maintenance, operations support, optimization, upgrades, modernizations, extensions, localized operations support/service centres, centralized operations service centres, open web-based and real-time information sharing, outsourcing, asset sharing, and financing, Of these, outsourcing, BOT, and asset sharing represent supplier s serious investments for taking responsibility for running customer s operations. This requires that the supplier participates to these operations also by its financing. The categorization of these services in terms of the five impact types in Table 2 shows the primary business interests that explain why these services are offered. Our empirical analysis also shows that many services are delivered in the form of a project. Examples of services provided often in project form are: consulting, software updates, systems optimization, systems integration, outsourcing, asset sharing, system extension, and modernization services. With some services, like outsourcing and asset sharing, the project form is used only partly to deliver the service; this often occurs, as the service may require that a project is needed in the initial set-up for example in the initial transition phase of outsourcing service. In case of outsourcing, the service itself is a long-term scheme that includes the supplier firm s investment for long-term operations business management, and the whole service itself cannot however be characterized by project form of organizing. 5.2 Equipment delivery and role of product technology basis All case companies have a history in equipment manufacturing. Therefore, each firm has a significant know-how and technological capability concerning a technical system. Each company has a strong product base. Most of the case companies are considering themselves as being in project business. However, a large share of their current business comes from services. A strong technological competence and product brand has obviously provided them with opportunities to move into services. Typically, these opportunities first appear as traditional after sales in the form of spare part sales, gradually to engineered system supplies and different kinds of more extensive operation and maintenance agreements. The latter is enabled in particular by the experience that the companies gather from their installed base. The more knowledgeable the companies become of the operational needs of their customers (i.e. operational environment of their customer s industries), the better equipped they are to consult their customers in their business planning (e.g. in planning new investments). Although this may not always be as straightforward a process as described here, it well reflects the following fact: what originally was the core business of the companies, now only plays a partial role in their project business. These observations are not to say that the product business would have become less important. For example, in (extreme) cases when the customer has outsourced considerable parts its operational activities to the supplier, the ability to utilize the latest technological advances might be the only way to gain enough comparative advantage to keep the business profitable. However, the product technology focus may still be a burden for many companies in their business models and organizational settings: their product technology base may even capture too much of their attention. This may imply that some firms may even too much concentrate on the underlying interest of advancing selling of their equipment and technical solutions instead of selling solutions more independently, or some companies may be too much locked to providing more services that relate to their own equipment, instead of providing services for an installed base delivered originally by their competitors.

15 15(19) 5.3 Versatile role of consulting types of services in solution providing In this section, with consulting types of services we refer rather widely to consulting, technical services, conceptual design and feasibility studies, optimization, and systems integration. In some cases the initial consulting services as extensive engineering design and systems integration or optimization where sold as separate entities. Such services are highly value-adding, and often margins are high. In general, the need and amount of consulting services where related to type of technology and degree of complexity. Most of the service types that were mentioned were seen as a close complement often integrated to existing offering and thereby impacting on the activity system of the company and giving new advantages. Increasing design and engineering to cover a much wider part than the own technology basis were mentioned as a possibility to create a new strong dimension in the business model. However, mostly these consulting services were seen as part of the marketing and sales activities giving an opportunity for continuous dialog and early entry with the customer. Therefore, many consulting types of services are often delivered to the customer free of charge. We could even use the term consultative selling to indicate to such services. The business logic with free consulting type of services is the following. Consulting, or consultative selling leads to bigger and bigger deliveries with the customer. Therefore, consulting serves as a growth engine that truly represents the core of providing solutions to customers rather than just products or separate services packages. Indeed, the generic solution-orientation and growth engine type of role with consulting type of services can be recognized from our analyses: from the analysis we noted the frequent occurrence of the consulting types of services through all three phases of the solution life time (for illustration of solution life time, see Figure 1). Consulting occurs in various forms and it is not necessarily always strongly related to a certain phase or step of the solution life time as is the case with many of the other types of services. Consulting can even occur more on a need or solution building base where the impact type can be of various forms. Much of the consulting services can be initiated with short notice, when an opportunity occurs. For this reason, some companies have their consultants even to work with their customers on a free-of-charge basis, for their presence that itself guarantees effective catching of hidden or latent needs and opportunities for business. Consulting activities where often also related to enhance the relationship and create a trust base for larger and more profitable activities. The free consulting services were used as references for strengthening the identity of the supplier and to enhance certain types of new technology. It was also mentioned that certain type of consultative interaction with the customer strengthened the relationship with the customer not only focusing on short term single contracts but more on long-term collaboration. 5.4 Emphasis on maintenance type of services With the term maintenance type of services, we refer widely not only to maintenance, but also to operations support, outsourcing and other types of services that relate to operating or developing the existing installed base. These types of services were extensive both in number and volume. Furthermore, these kinds of services have developed into whole businesses with rather complex interrelatedness of the services in the supplier firm s business models. It is even the case with some companies that the core project deliveries may not play no more so important role in terms of the volume or profitability, but the role of the core projects and core product technology may be to indirectly support the firm s technological advancement that enables even more worthwhile business that relates to the installed base and maintenance type of services. The interrelatedness of the services delivered after the project is not only characterized by the facts that one service often leads to another or services may be interwoven with each other. Instead, the complexity is considerably increased by potential controversial or even cannibalization-like relationships that the services may have. For example, in consulting the customer is must often be provided the best solution independently, and this may sometimes require that the suggestions do not rely on own firm s equipment deliveries. Also, outsourcing contract may even cannibalize an ongoing more profitable maintenance/operations support contract with the customer, but despite this, the supplier is willing to take larger outsourcing responsibilities with even lower margins, due to the interest of creating a closer and more stable customer relationship in the highly competitive situation in the market. In our case companies, the organizational arrangements of having different services in different units may enable independence between certain service offerings, but on the other hand effective integration is needed to interweave the firm s offering into a consistent whole solution for the customer.