Digital is permeating every industry at mind-numbing speed, creating both opportunities and challenges for growth. Prospering in this disruptive digital age depends on finding the right balance of refreshing the company’s core products and services – those that generate the lion’s share of today’s revenue – and innovating the next generation of products and services that will ultimately become the core.
Unfortunately, many established companies are failing to keep their core products and services relevant and growing.
MIT Sloan Management Review recently published an article on an Accenture study that analysed the performance of over 1,200 companies in the automotive, energy, industrials, materials, telecommunications and utility industries. The study found that many incumbents are falling prey to “compression,” a form of slow change that results in a prolonged decline in both operating profits and revenue. A primary factor contributing to compression is the inability of incumbents to pivot their core business to face digital disruptions head on.
Such compression is often rooted in complex R&D structures and processes, tactical sourcing strategy, and shifts in business priorities and internal limited resources to long-term strategic initiatives. The result is outdated and expensive-to-maintain core products and the erosion of competitiveness. In turn, the slow slide restricts cash flow and the ability to invest outside the core, which accelerates compression. The longer a company postpones the hard work of transforming their core, the more compression will erode the financial headroom required to transform the core business and generate new growth.
So how shall companies break the compression cycle and strike balance?
Addressing compression is an uphill battle for companies to solve on their own because the limited resources they have-assets, capital, people and time-must be shared between the core and the new product and services. In our experience, what’s needed is a three-prong strategy to solve the compression challenge sustainably:
Digital Remastering: To remain competitive, companies need to digitally remaster those mature core products that have the untapped potential for growth. They need to push others toward end-of-life to minimize the drag they have on the business, which frees up internal resources for strategic new products. Digital remastering starts with a “design-led engineering” approach to modernize the product and the user experience and enrich them with next-generation capabilities including cognitive, cloud, connectivity, microservices-based design and security. Remastering opens opportunities to enter adjacent markets, and new geographies, platform ecosystems and deployment models, which improves competitiveness and generates revenue growth.
Engineering Agility: Companies need to simplify their R&D models, reduce the number of complex handoffs and unclear accountability, and increase product-release velocity, which needs to be measured in days and weeks, not months and years. Incident resolutions need to be proactive and quick to maximize availability. The R&D cost structure needs to remain flexible and fast paced so it can respond quickly to unpredictable demand and business performance risks. Traditional R&D models need to go beyond automation by embedding machine-learning capabilities in development, testing and support services to unlock greater effectiveness and efficiencies, speed time-to-market and reduce costs.
Outcome Sourcing: Given limited resources, many companies can benefit from transferring engineering and management responsibility of the promising core products and services to an external services partner. The challenge is to identify a partner with the necessary design and engineering expertise, experience with new digital technologies, and the resources and collaborative models to manage the business. Also, the outsourcing partner must have competencies in both existing and new domains, and the risk appetite and passion for transforming and evolving core products. These must be strategic sourcing relationships that companies establish with their service providers. They go beyond a tactical, project-centric approach to a broader outcome-driven product-centric engagement where the service provider should be measured by the client’s desired outcomes it delivers, the behaviour it exhibits, how much it is willing to invest and how much risk it is willing to own.
This is where Aricent’s Product Transformation Services offering comes in to helping companies overcome the challenges and risks of core compression by delivering on the three- pronged strategy.
As an example of this strategy in action, a fortune 500 technology company needed to re-energize a successful core suite of secure networking products. The company engaged Aricent in outcome-driven business model to accelerate its roadmap, rearchitect the product to be cloud-native with microservices, modernize the user experience and enable its sales channels to make the products relevant to new industry segments as well beyond existing dominant position in financial services and drive revenue growth in excess of $200M over time.
In my next blog, I will provide more client engagement examples and details of how our Product Transformation Services addresses rejuvenation and generates revenue growth for the core.