Why Service Businesses Are Not Product Businesses

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STRATEGY

What company in a service business has not weighed the advisability of offering products? What manager in a product-oriented business has not thought about growing revenues by adding related services? Expansion often seems to make sense, but if an expanding company limits itself to approaches that work in its old sector, it is likely to find them unsuited to the new sector. The software industry provides instructive examples.

Intense competition and the need to maintain a high growth rate have led numerous software service companies to try repackaging the knowledge they have gained creating customized software solutions for clients — and to sell it as a more generic product. Their attempts to cross the chasm between the service sector and the product sector have met with grim results: Approximately 87% of software service companies' product initiatives from 1995 through 1998 failed.

Satish Nambisan, a professor of management at Rensselaer Polytechnic Institute's Lally School of Management and Technology, argues that service companies fail to recognize important differences between the ways the two sectors do business. On five key issues (intellectual property rights, product complementarity, returns from scale, abstracting knowledge and connections with users), service companies and product companies are often at opposite poles. Five case studies show why service companies must modify the service mind-set to suit the product market, but without giving up their unique service-sector insights.

His recommendations? When it comes to marketing, focusing on a niche market or linking with an established product are good tactics; packaging generic domain knowledge can be more risky. Companies must encourage knowledge sharing among their employees and cultivate long-term relationships with users. Finally, they must reassess the trade-offs between design flexibility and ease of development and between process flexibility and process efficiency, being sure in both cases not to sacrifice the former for the sake of the latter. The importance of understanding the new sector holds for software companies transitioning in the opposite direction — as well as for enterprises in other high-tech industries with both a service and a product sector.

Satish Nambisan is an assistant professor of management at Rensselaer Polytechnic Institute's Lally School of Management and Technology. Contact him at nambis@rpi.edu.

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