Not too long ago, in my discussions for the podcast or at industry events there was a lot of talk around the relevance of outcomes versus products (or solely services). Leaders would share stories about what customers really want – peace of mind – to evangelize thinking beyond the traditional products + services equation. At this point, it seems the value of outcomes-based service is understood, and the talk has shifted to: How?
If you missed last week’s podcast with Alastair Winner, partner and co-founder of Mossrake Group, a consulting firm that helps organizations bring advanced services solutions to market, I’d encourage you to go back and have a listen. We cover a lot, and his advice is spot on, and born of years of experience both as a provider and a consultant.
For those of you that prefer reading to listening, let me recap some of the important points that I think are relevant for anyone and everyone on the outcomes-based journey, whether truly at the beginning or along the path of brining the vision to life.
Defining Outcomes
First and foremost, it’s important to clearly define what you mean when you’re saying “outcomes-based” service. As Alastair points out, this topic has been subject of a lot of buzz and is subject to many loose interpretations.
“It's one of those buzzwords that tend to get used a lot. But when but when you scratch beneath the surface, very often you'll find quite different experiences and solutions,” he says. “We define what we meant by outcomes in four key steps. Firstly, it's this combination of products and services that are presented to the customer as a service. Secondly, the value of that outcome is described in a language that the customer really understands. The third point is that we need to measure the outcome with an outcomes KPI that describes the outcome in a way that both the service provider and the customer agrees is applicable. And the fourth point is that the service provider is responsible for ensuring that the outcome is delivered over the time specified in the service contract. What we have seen very often is that product companies will take their traditional products and services, combine them together in a similar way, but present that through some sort of leasing mechanism. Which certainly has some value but, in the end, still has all of the operational overheads and risks that you would associate with any other purchasing model.”
As outcomes-based services become more widely used, the savviness of customers is rising – making it important for providers to understand the rules of engagement and what savvy customers will be seeking (and avoiding). While savvy customers are on the rise, the majority aren’t yet, which is also important to note as it gives the provider an opportunity to help lead the way, build trust, and be seen as the knowledgeable and capable party a customer will want to purchase outcomes from.
Understanding the Outcomes Personas
Who you sell outcomes to will be different from who you’ve sold traditional products or services to, and developing your understanding of the personas involved in an outcomes agreement is key to successfully selling. “Most of the work that we've done is introducing this as a new business model, a new concept, which will require you to talk to more people than you would have otherwise,” explains Alastair.
He gives a synopsis of the five personas commonly involved in outcomes:
- The operational owner – historically has taken responsibility for the technology domain or area that your service is going to address. They'll be overseeing the operation, doing lifecycle management activities, coordination of all that work. They'll be the primary contact and most likely the entry point most service providers will have to the customer because you have a relationship there.
- Operational owner’s leadership – because it’s something new, they're going to be likely engaged in the dialogue. And part of the value of these services is to liberate resources. So rather than having your own employees focused on doing some of these activities, the service provider is going to be doing that work. And that releases capacity that can be reused and that manager is likely to benefit from that. They’ll also be trying to demonstrate a level of stability.
- Finance – again, any sort of financial change is going to require finance review. This is one of the stakeholder groups that you really need to get to early because their opinion will matter significantly as to whether or not a company is going to accept this shift from CapEx to OpEx. We've had some experience where you've gone all the way through the sales cycle, got very excited, only to put it in front of finance and they've said, no, we're not doing that.
- Procurement – sort of on the more periphery, if a company has a procurement team they’ll be involved in any buying. This will likely be something quite new, so you need to spend some time recalibrating.
- Legal – again, sort of more periphery, but legal is likely to have a new set of terms and conditions, a new scope of work. Legal departments will have templates typically that they like to use with their suppliers, and this is likely not to fit with any of the templates that they have today. So, procurement and legal will likely be involved in the negotiation and crafting the final terms and conditions.
Shared Risk
Providers of outcomes must accept that risk is inherent in the business model. “That's one of the big differences between this model and a traditional model. When you sell a customer a product, the accountability and the risk for the value that that product creates immediately transfers to the customer. In an outcomes-based model, there is an onus on the service provider to deliver that value,” says Alastair.
With risk comes potential reward, so it’s important to understand the benefits and risk on both sides of the agreement. “From a customer perspective, some of the risks that they're going to be thinking about are the fact that this is likely going to be a long-term services commitment – this can make them feel locked in. They're going to be handing over operational control and that itself can cause apprehension. They may ask, what happens if the business needs change over that long period of time? Can I get out? Can I adapt? Can I change the service?” explains Alastair. “The benefit to the customer, of course, is that they'll get this agreed outcome. It'll liberate some capacity for them. They'll get to work ideally with a trusted brand who are providing this curated experience at a predictable cost. It really simplifies their operation, allows them to go focus on their core activities while the service provider deals with this sort of critical non-core type of work.”
Then there’s the appeal and apprehension side for the provider. “If I look at it from a service provider perspective, they're likely to have to make some sort of upfront investment in technology, hardware, or software. And probably, they're going to have to think about putting capacity ahead of demand, especially if they're able to provide some level of flexibility to the customer. So, the customer is not making an upfront investment, but the service provider is. So that's a risk. And of course, then they've got to think about all the lifecycle activities to sustain the service and deliver the outcome over the contractual period, which could be up to 10 years. When you think about all of the updates and changes and recalibrations and replacements that have to go on over that period, you've really got to be thinking about what that looks like and costing it accordingly,” says Alastair. “The benefits for the service provider are they get a long-term annuity stream with almost certainly a higher rate of return. Over that contractual period, they're going to get service on everything over a very long time, and they're going to end up with a very loyal customer.”
Three Levers to Balance Risk
While accepting risk is critical, Alastair does share three levers providers can use to help balance the risk and reward to ensure its achieved and both parties feel like they end up in a good place. “In our experience, there are three elements that service providers will typically use. One will be simply the initial contract term. How long are you going to lock a customer in for? And does that give you enough time to recover the upfront investment that you've made?” explains Alastair. “Then there's what we call minimum commitments – the service provider and customer will agree a minimum number of units or services that are going to be consumed over that initial contractual period that will provide the service provider with a guaranteed income. And there is a premium for flexibility. The final one is exit fees. In the event that a customer chooses to leave the agreement early, you can build in this concept of a balloon payment at the end, should they decide to leave. Ideally, and in most cases, if the service is well designed, they'll just continue and the balloon payment risk will disappear over time.”
Alastair also points out that a provider must be cognizant of the dependencies on the customer that will exist in order for the provider to ultimately deliver the agreed outcomes. “Dependencies must be understood and called out in the contract,” he says. “There can also be a danger that a service provider can get pushed into a KPI where they really don't have ultimate control. As a provider, you need to ensure that you can deliver the outcome that you're agreeing to and that dependencies are well defined.”
Anticipating Common Objections
When it comes to selling outcomes, knowing what issues may arise during the sales cycle will help you prepare in advance and respond adeptly. Each of the involved personals may bring up different questions, issues, or objections. “From an operations perspective, I think one of the big objections and things to watch out for is the fact that very often it's the individual that you're talking to or their team who is going to be disrupted by the introduction of the service. So, you could be very eloquently talking about the value proposition of your outcomes-based service to a guy or gal who is thinking, well, this is going to take away my job. You have to be very conscious of who it is you're talking to and the implications of what it is you're proposing to the individual that you're dealing with. You need to reframe that to point out the unique opportunity of outcomes to free up the team to focus on something that's core to the business. It's going to deliver far more business value,” shares Alastair.
The management team will likely want more detail on this same angle – what other activities will an outcomes agreement enable them to have time for? What does this add to their bottom line?
“From a finance perspective they’ll be looking at how the spend will change in moving from CapEx to OpEx and determining if that is acceptable and beneficial for the company. Again, we’ve had some experience of getting to very late stages of trying to position a deal only for the finance team to say, well, this simply won't work because actually, there's some advantage for us holding capital on our balance sheet. It makes our company valuation look more positive. I wouldn't second guess the objections that might emerge from finance. The key is to get it in front of finance as early as you can to seek an opinion,” urges Alastair.
Building in lead time to navigate conversations with procurement and legal is advised. “Often when procurement is presented with an outcomes-based model, they'll find it hard to find alternatives in the market to do their typical comparison, which can look very confusing and can create an objection. The objection there is, well, I can't really follow my process. I haven't got three suppliers that are delivering this. You guys are the only people in the market that are offering it right now. What do I do? That could be challenging,” Alastair explains. “The legal team will have some templates and every company will have a scope of work that they've agreed, which is how they would like to buy. We’d encourage a service provider to create their own scope of work terms and conditions, so it's on the supplier paper, not the customer paper. Be very clear which of the different sections and clauses are likely to be ones that are in the domain of legal. Based on the familiarity with the business model and the savviness of the legal representative you might be working with, you just need to be prepared to spend quite a bit of time there and expect there to be some back and forth as the contract ends up taking shape.”
Getting Started (If You Haven’t Already)
Does this all sound daunting? It can, but the potential is vast and worth exploring. If you find yourself more in the assessment phase or early stages versus well along the journey, Alastair offers some advice: “Do some collaboration, co-creation work with some trusted customers, especially in the early stages of service development to really understand how the customer is thinking about the value of the service, how KPIs might emerge from that work that align with their business. Also think about what we would term a system of record, because outcomes KPI needs to be reliably measured and there needs to be a single point where both the customer and the service provider can view in a consistent way. Finally, don’t try and impose this on a customer. Use your starting point to help them understand the concept and then refine for the customer to meet their needs. It takes time. The selling process for a solution like this is going to be longer than a traditional product sale. Spend the time to get this right and to ensure that the customer really understands.”