The leading corporations of the 20th century were rigid and clunky. As they expanded, they added organizational functions and created more infrastructure to support their operations. Many of them optimized their capabilities over decades – but when experiencing stormy waters, these organizations could not turn the tanker fast enough (think Kodak). In contrast, 21st century business champions are adaptive and lean. They scale up and down more rapidly by subscribing to services instead of expanding corporate functions and adding massive IT infrastructure to their balance sheet. As a result, these organizations operate with lower fixed costs and have the ability to respond almost instantly to changing market conditions.
The success of Amazon Web Services (AWS), and cloud computing as a whole, is a prominent example of this dramatic shift. Building and maintaining data centers using a do-it-yourself approach typically doesn’t pay off any longer. The minimum volumes required to reach break-even are far out of reach for most organizations. In addition, innovation cycles are accelerating and technology is advancing at rapid pace. In turn, equipment needs to be upgraded or replaced more frequently, which represents a major and ongoing financial burden. Amazon has positioned itself to take advantage of the “cloudification” trend, pocketing $4.1 billion in revenue in the second quarter 2017 alone – up a whopping 42 percent compared to 2Q/2016.
New service segments are emerging as providers evolve beyond IaaS, PaaS and SaaS
The market for subscription-based services is evolving at lightning speed. In recent years, IaaS, PaaS and SaaS were among the most visible categories to enjoy huge rates of adoption. According to findings from 451 Research, the ‘X-as-a-Service’ model is now being extended to new cloud-based segments that follow the pattern of ruthless standardization and automation, rapid provisioning, and reduced overall complexity. The services – which include managed security, managed backups and cyber-disaster recovery, managed networking services and managed hosting – are also available on a pay-per-use basis. Given the increasing number of cyber-threats, managed security in particular is one of the most promising of these services, poised to see double-digit growth in years to come.
Scalability is changing traditional dynamics, allowing even small companies to enter the arena
Scalability is a big game-changer. The service economy now allows even small and medium-sized firms to enjoy the benefits of scale without having to build or own costly assets themselves. Rather than growing support functions and infrastructure internally, these firms make smart use of third-party services. This, in turn, enables them to focus solely on their core competences – the things they’re really good at – and outsource other functions that would otherwise unnecessarily occupy resources and management attention. Consequently, these organizations can scale quickly at variable costs, while remaining lean and highly agile.
Many vendors have advanced from physical delivery to a cloud-based model. In this context, the role of the channel is now growing in importance – especially when it comes to consulting work, maintenance or troubleshooting. Focusing on the customer journey and providing a superior customer experience is the recipe to success in this game. Rather than focusing on technology and infrastructure, best-in-class providers differentiate themselves through attributes such as service choice or ease-of-use.
The service economy is still at the fledgling stage, leaving ample room for growth for companies across the board
As highlighted in the KPMG report The changing landscape of disruptive technologies, companies such as Amazon, Google, Microsoft, Salesforce, ServiceNow and Workday are offering new cloud-native capabilities that provide a more hassle-free and frictionless experience. In step with this evolution, cloud-based service providers are becoming the default option for back- and middle-office functions, drastically reducing the size of companies that begin to remove non-core functions from their balance sheets.
While the tech space is spearheading this radical transformation, virtually companies across all verticals can convert their products into a smart service. Gartner predicts that by 2020, the digital transformation will trigger a 25 percent shift in user expenditures from “procure and maintain” to “service-oriented” models. Emerging technologies such as Artificial Intelligence (AI), Big Data Analytics, Machine Learning or the Internet of Things (IoT) enable companies across the board to reinvent their operating model and come up with a proprietary service offering.
Manufacturers are providing “products-as-a-service” – with car-sharing or jet engines (pay-by-the-hour) being just two examples. Financial services are another: a growing number of institutions are forming joint ventures to pool back-office expertise and resources to create market utilities focused on specific functions such as client services and onboarding, trading and execution, and cash and collateral management, as stated by KPMG. Aiming to reduce costs and gain efficiency, more and more tier-1 banks are receptive to the idea of bundling their activities in shared-service models, according to a survey conducted by Finextra. Goldman Sachs, JP Morgan, and Morgan Stanley joined forces to clean piles of reference data at a lower cost than each firm would have had to bear individually. Though the service economy has picked up steam in the recent past, it is still in its infancy.
Established conglomerates have run their business for decades under the assumption that consolidating operations in-house lowers transaction costs. However, the increasingly connected digital universe turns that assumption upside down. This disruptive change is likely a mere shadow of what’s to come. Small and medium-sized firms, especially those launched in the more recent past, have already embodied this mindset, but primarily out of necessity rather than strategic intent. Incumbent enterprises are beginning to harness the benefits of utilizing third-party providers, but most are following the same routines they’ve used for decades – leaving ample room for growth for vendors to seize opportunity.