This document discusses breakthroughs needed in service economics. It argues that the maintenance model for services will shrink, lowering margins. It predicts project-based services will grow faster than maintenance, also lowering margins. It calls for new service offerings that add value, and practices with dramatic efficiency gains. It outlines new financial models and measurements needed to capture the total economic impact of services. It stresses the need for executive awareness, aligning service strategy to opportunities, and increasing investment in service research and innovation.

1. Breakthroughs in
Service Economics
J.B. Wood
President and CEO
AFSMI – SSPA – TPSA

2. SSPA/TPSA 2006
The Technology Consumption Gap
The
Consumption
Gap
The #1 Long-Term Threat
2

3. 2009+: A VALID ASSUMPTION?
Going forward, services will grow
faster than products and will
become more profitable/cheaper to
deliver than they are today.
TRUE or FALSE?
3

4. Services Growing Faster Than Product
4

5. Services Margin has Trended Up But…
Q4 2005 Q3 2007 Q1 2008 Q3 2008 Q4 2008 Q1 2009
Average Service Gross
44% 49% 43% 45% 42% 49%
Margin
Average Operating Income 6% 8% 10% 12% 12% 15%
5

6. What If It’s True AND False? (or False and False?)
• TRUE – Services will grow faster than products.
– Services will become more profitable
than they are today.
A Scary Thought
6

7. Why Might the Margin Trend Reverse?
FOUR KEY PREDICTIONS BY AFSMI/SSPA/TPSA
1. Maintenance model will shrink − margins and growth
will decline.
2. Demand for lower margin, project-based services will
increase faster than demand for maintenance.
3. Declining returns on current service innovations.
4. Global labor costs will increase while price
decreases.
7

8. PREDICTION
Maintenance Model Will Shrink –
Margins and Growth Will Decline
Ahh
$
choo!
8

9. How the Maintenance Model Grows
Maintenance Revenues
# Service Contracts Average Selling Price Per Contract
# New Product Units Sold Existing Contract List Price of Full or Discounted
Renewal Rate The Product Contract Price
X Attach Rate
OK Not OK Not OK
OK
9

10. New Product Sales Can Mask
the Maintenance Price Pressure Problem
Existing Contract Base – Shrinking Revenue Per Contract
New Contract
10

11. Maintenance at a Tipping Point
Maintenance Revenues
# Service Contracts Average Selling Price Per Contract
PRICE PRESSURE IS GROWING
SALES ARE SLOWING
11

12. The Double-Edged Sword
• When maintenance is growing, low
incremental cost to serve is a good
thing – better and better margins.
• If maintenance begins to shrink,
costs will not go down. Margins will.
12

13. Be Nervous!
$
13

14. What Happens If Project-Based Services
Grow Faster Than Maintenance?
Services Gross Margin: HP
25%
Post EDS
20%
15%
10%
5%
0%
Q1 2008 Q1 2009
A Simple Change in Revenue Mix
Will Lower Blended Margins
14

15. A Simple Change in Revenue Mix
Will Lower Blended Margins
For a $100M Service Business Impact of a 10% Change In Mix
Service Type % Rev Gross Gross Service Type % Rev Gross Gross
Mix Margin Profit Mix Margin Profit
Maintenance 70% 50% $35M Maintenance 60% 50% $30M
PS 30% 20% $6M PS 40% 20% $8M
Total 41% $41M Total 38% $38M
7.4% Decline
15

16. Even Worse if Maintenance
Margins Erode
For a $100M Service Business Impact of a 10% Change in Mix
Service Type % Rev Gross Gross Service Type % Rev Gross Gross
Mix Margin Profit Mix Margin Profit
Maintenance 70% 50% $35M Maintenance 60% 40% $24M
PS 30% 20% $6M PS 40% 20% $8M
Total 41% $41M Total 38% $32M
22% Decline
16

17. WHAT DO WE NEED NOW?
Incremental Improvement
or Breakthroughs?
Progress
Progress
Time Time
17

18. Current Service Activities
Encourage Incrementalism
Service Results
Service Offerings Service Practices
18

19. A Few Interesting New Service Offerings
Service pricing models,
not services Cloud SaaS
TS
FS
In Home
OS
PS
MS
ED
Depot
TPM
Early Stage Promising Proven
19

20. But Few Big, Promising Service Practice
Innovations on the Horizon
MVS Self-
Automation
Service
Full CRM
Deploymt KM
IP Mgmt Communities
Flash
Web Consolidated
Collaboration Customer History Strategic
Outsourcing
PSA
FS Pull
Product Scheduling
Self Healing Embedded
Proactive
Expertise CBT
Support
Management Email
VOC
Automation
Analytics
Success Proactive
Analytics Will success here help Chat
eLearning
or hurt maintenance value?
Early Stage PROMISING Proven
20

21. THE CONSUMER SUPPORT LESSSON:
How Much More Will We Outsource?
35% 90%
80%
30%
70%
25%
60%
20% 50%
Consumer 40%
15%
Industry at Large 30%
10%
20%
5% 10%
0%
0% Percent of Customers Percent of Customers
First Level Support Second Level Support Satisfied w/ Direct Support Satisfied w/Outsourced
Outsourced Outsourced Phone Support
21

22. Even the Current Measures of Service
Reflect the “Old World” View
• Service Revenue Growth
• Service Gross Margin
• Attach Rate
• Renewal Rate
• Service CSAT
• Discounts
• Project Profitability
22

23. What Do We Need Now?
Breakthroughs?
Service Results
Progress
Service Offerings Service Practices
Time
23

24. Breakthroughs in Service Economics
• Offerings That Add New Levels of Value
• Practices That Offer Dramatic Efficiency Gains
• Results That Pull Product
24

25. BREAKTHROUGHS IN SERVICE OFFERINGS
The Absurdity of Service Alignment to
Customer Value
H H
VALUE
# Current Service Providers
REALIZATION
Potential
Value
Number of Value
DEPLOYMENT
Vendors Of The
Who Offer Product
Services Acceptable
Value And
Service
INTEGRATION To The
INSTALLATION
PURCHASE Customer
Customer Product Consumption Lifecycle (what they buy, how they use it and the value they receive)
25

26. BREAKTHROUGHS IN SERVICE OFFERINGS
We Must Move From the
Availability Services Era…
Services That Establish
and Maintain
Product Availability
26

27. BREAKTHROUGHS IN SERVICE OFFERINGS
To the Value-Added Support Era
Services That Create Markets,
Pull Product,
Increase Product Value
27

28. THE VALUE-ADDED SUPPORT ERA
A Totally Different Service Mindset
Get/Keep the Create New
System Running Customer Value
Technical Application
Expertise Expertise
Reactive Proactive
28

29. BREAKTHROUGHS IN SERVICE OFFERINGS
Even a Step Beyond!
Services That Create Markets!
MARKET
Service Science
Will Create New Businesses i.e., Search Technology
for Your Customers
SERVICE PRODUCT
29

30. Smarter Planet
and
Service Science
Jim Spohrer
Director, Global University Programs
IBM Almaden Research Center, San Jose, CA 95120 USA
spohrer@us.ibm.com
April 12th, 2009
Global University Programs © 2009 IBM Corporation

31. Our World and Us
Smarter Service Systems =
Planetary Systems Complex Systems Human Systems
that Serve Customers Better
water, electricity, transportation, education, healthcare, etc.
Quality of Life
Global University Programs © 2009 IBM Corporation

32. The World is Getting Smarter – As we build better service systems
SSME educates people about complex systems that serve customers
…about a diverse ecology of types of service systems that all interact
Smart traffic Intelligent Smart food Smart Smart energy Smart retail
systems oil field systems healthcare grids
technologies
Smart water Smart supply Smart Smart Smart Smart cities
management chains countries weather regions
Global University Programs © 2009 IBM Corporation

33. IBM: Once More, Tech Industry Poster Child
33

34. BREAKTHROUGHS IN SERVICE PRACTICES
Services Convergence
• Professional • Outsourcing
Services SKUs & Managed
Shared Services Services SKUs
Infrastructure
Strategy Knowledge Tailored,
Prescriptive
Offerings That
Combine SKUs
to Meet Individual
Systems & People Customer Needs
Process
• Education • Customer
SKUs Support SKUs
34

35. In Some Practice Areas Consumer
Support Is Leading the Way
% of Service & Support Budget Allocated to Service &
Support Sales Efforts
12%
10%
8%
6%
4%
2%
0%
Consumer Industry at Large
35

36. Yes, Support CAN Sell –
Even to Consumers
Made unplanned purchase due to 21%
prompt from CSR 28%
Would upgrade software if prompted by 34%
CSR 43%
Would renew service contract if 30%
prompted by CSR 37%
0% 10% 20% 30% 40% 50%
High Value Customers Low Value Customers
Source: Jupiter Research/Ipsos/nGenera
36

37. BREAKTHROUGHS IN SERVICE MEASUREMENTS
Measuring Total Economic Impact of Services
NEW MEASURES: OLD MEASURES:
• License Consumption • Service Revenue Growth
• Product Margins • Service Gross Margin
• Cost of Sales • Attach Rate
• Days-to-Repurchase • Renewal Rate
• Market Size • Service CSAT
• Product Adoption Rate • Discounts
• Market Share • Project Profitability
• Customer Insight for
Product/Solution Development
• Services-Led Markets
37

38. The Danger of Waiting
Maintenance
38

39. 5 Things We Need to Get Started
1. New Financial Model + Proof Points
2. Executive Awareness
3. Strategy Alignment (Services to Corporate)
4. Services R&D
5. We Must Work Together
39

40. 1. Two New Financial Models and Proof Points
• Service Economic Impact Analysis (SEIA)
– SSPA, TPSA, AFSMI Advisory Boards are developing with our research
team
– Collect real life case data from member companies
– What if people were on the balance sheet?
• Total Account Profitability Accounting
– We will search out best model
– Publish to members
– Collect real live case data from member companies
• AFSMI, SSPA, TPSA Research Data:
– Updating all Benchmark Studies to include SEIA
– Writing case stories of companies who can prove SEIA beyond the
service P&L
40

41. 2. Executive Awareness
New Book Coming Sept 2009!
COMPLEXITY
Table of Contents
AVALANCHE
Chapter 1 The Technology Consumption Gap The Rise of Services in Tech
Chapter 2 The Maturing of Tech and the First Law
of Services Gravity
Chapter 3 Growing Problem’s with Today’s Service Business
Model
Chapter 4 The Value-Added Support Model
Chapter 5 Implications for the Organization
Chapter 6 Courage to Chart the Course
Chapter 7 Not Your Father’s Industry Association
J.B. Wood
CEO of the AFSMI, SSPA and TPSA
41

42. 3. We Must Align Our Strategy with Our
Opportunities
• Offensive Not Defensive Service Strategy
• Strategy Alignment:
MARKET
A New Model A Maintenance
for the Entire Service Stack Model
SERVICE PRODUCT
42

43. 4. The Service Research and Innovation Gap
The pressure on services But services R&I practices
is steadily increasing … are severely lagging
Key Revenue Mix Trends: TPSA Service 50 Data Of Tech Companies Surveyed …
8% 80% Only 13% view SR&I as a dominant
7%
7% 67% 70% business strategy
Only 31% have a dedicated SR&I group
Increase in Svcs % of Rev (pts)
6% 60%
5% 52%
Q109 Svcs % of Rev
5% 50% Only 25% have a formal budget for SR&I
4% 36% 40% Only 36% have a formal SR&I roadmap
3% 3%
3% 30% Only 38% invest more than 2% of rev in
2%
2% 20% SR&I
1%
1% 10% Only 30% have increased investment in
0% 0% SR&I in the last 3 years at all
Same HW Companies Same SW Companies All Same Product Companies
Q407 - Q408 Increase Q108 - Q109 Increase Svcs % of Rev Q109
43

44. What Does IBM Know That Your
Company May Not?
44

45. Our Vision – A Moore’s Law for service system improvements
as service system become increasingly enabled by ICT advances
Service System/Network
1. People
2. Technology
3. Shared Information
4. Organizations
Computational System Connected by Value Propositions
More transistors, more powerful More win-win interactions, more value
Requires investment roadmap Requires investment roadmap
Global University Programs © 2009 IBM Corporation

46. Almaden Service Research Center:
8x ROI on base funding in 6 years
Projects (focus on business, science/technology, and relationship results)
– CBM, IDG,SDM Pricing & Costing, BIW COBRA, SIMPLE, IoFT, etc.
– 9 accomplishments awards ($10M impact each) and 2 outstanding awards ($100M each)
– Manage multiple 3-5 person project efforts to accomplishments in 2-4 year periods
– If appropriate, increase to 6-10 person effort to achieve outstanding in additional 2-4 years
Portfolio Approach (focus on service system resources, stakeholders, measures)
– 1. Improve existing offerings (value propositions)
– 2. Create new offerings
– 3. Improve insourcing, outsourcing, acquisitions, divestitures results
– 4. For all three of the above, improve customer/partner capabilities
– 5. For all four of the above, increase patents and service IP assets
– 6. For all five of the above, increase publications and service knowledge
KPIs = Key Performance Indicators, measures of service system performance;
including quality, productivity, compliance, and adaptiveness (sustainable innovation)
Global University Programs © 2009 IBM Corporation

47. 5. We Must Work Together to Transform
Our Company and the Industry
• Are We Up to the Challenge?
• Can We Rally the Total Company?
• Can We Get Started Even In Tough Times?
• Can We Learn from Each Other?
This Is Not Just a Big Company Problem.
It Spans Company Size, Product Category, Market Served.
47

48. Thank You
Enjoy Technology Services World Spring 2009!