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Creating value in hardware and software businesses has become more challenging in recent years.
A decade ago, companies bought piecemeal IT capabilities from several hardware and software vendors, and did their best to integrate. Today, driven by customer demand for less complexity, lower total cost of ownership and greater flexibility, technology companies are increasingly focused on selling bundled hardware, software and service solutions, often delivered in the cloud on an as-a-service basis.
As technology companies move toward selling these end-to-end solutions, they are discovering that success requires equally radical shifts in internal pricing capabilities and processes. Without these shifts, hardware and software providers risk being blind to the value they can provide customers, as well as the true costs to serve them. Pricing models, analytics and even accounting systems designed to support the previous way of doing business must be modified to unlock new opportunities to grow profits.
However, many technology companies have already invested extensively to develop and align pricing strategies, tactics, organizations and processes—and may feel that adapting pricing capabilities and profitability analytics again is a daunting task. Fortunately, the required changes are relatively minor and can be expedited if you keep four key ideas in mind during the adaptation process.
Hardware and software companies that have sophisticated pricing capabilities, but an outdated view into profitability, will need to update their pricing capabilities and processes.
Incorporating these four key elements in the adaptation plan will maintain focus and avoid rework that could erode some of the profitability gains:
Understand the full spectrum of new and altered costsBring together key stakeholders and collaborate on a finalized list of all potential costs and allocation methods. Make changes to the core pricing system once.
Get the new allocations rightAllocating new costs is an important exercise. While it may have been okay to have a general idea of costs under the old multiple hardware and software provider days, this is much less the case today.
If the allocations are incorrect, your company will be unable to understand the actual value of each bundled deal.
Have the right support structure in placeEnsuring the correct processes and operational discipline is in place will greatly streamline the shift to your updated view into profitability. The optimum structure includes clear pricing and discounting guidelines, an approval process that ensures compliance, the right financial reporting tools to track performance (under the new metrics) over time, and a continual culture of leveraging these tools for value realization.
Focus on the opportunitiesUnderstanding overall profitability, reprioritizing and focusing on the most profitable customers, and reevaluating subcontractor relationships that cost too much to maintain can lead your company toward a host of new business opportunities.
Before bundled solutions, technology companies generally believed they understood the cost of goods sold (COGS) and other direct costs. Yet, once they embraced the power and value of profitability analytics, many of these same companies found that a customer or product’s share of indirect costs, such as marketing, sales force time, customer support, integration with customer billing processes, and other overhead items were making or breaking their margins. Properly accounting for these elements and incorporating them not only into pricing, but also into customer, product and sales strategies often proved the difference maker in terms of market leadership.
Now, in the era of bundled solutions, technology companies are playing out the same storyline with a new cast of characters by suggesting, for example, that they know the costs of a subcontractor’s services based on the invoices received each month. However, just as before, the hardware and software companies are not accounting for the numerous indirect costs involved in delivering end-to-end solutions.
IT companies have to update their current pricing capabilities and profitability analytics to handle all of the new activities and services, and modify time and resource assumptions accordingly. The blind cost elements that proved to be the difference maker before are poised to do so again.
Enhanced profitability analytics and pricing strategies have had a substantial impact on improving the bottom line for many software and hardware providers, as well as other types of companies. Unfortunately, the shift from selling individual components to complete solutions once again has obscured visibility into the true costs to serve. Despite the value of updating the underlying cost allocations and methods, many companies have not begun the adaptation process.
Properly establishing these metrics from scratch can be a significant effort, requiring realignment from the strategy and organization, down through processes and underlying data. Fortunately, many technology companies already have the foundational capabilities in place. Updating the profitability analytics to reflect the current market environment is a much more straightforward task. Smart companies will recognize that they do not need to reinvent the wheel. Instead they can leverage much of the work already completed and focus on adapting the pricing capabilities and profitability analytics—minimizing both costs and internal hurdles in the process.
May 20, 2013
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