Decoding Digital w/ Accenture

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David Sovie: [0:06] This is not a small little tweak to your business. It is a fundamental transformation of your business model, and it needs to be board and CEO sponsored, and you need to think holistically, because it impacts every single process. It impacts how you develop products, how you market them, how you sell them, how you service them.

Vik Viniak: [0:25] Once you're on this journey, you're all in. You have to stay patient and you have to stay persistent on this journey. You can't just turn around in six months and say these things are not happening fast enough because to turn around a ship, it takes time.

Daniel Saks: [0:39] This episode of "Decoding Digital" is going to be a little bit different. Instead of interviewing one guest, I sit down with two of the foremost experts in digital business models, David Sovie, and Vik Viniak.

[0:53] In their roles as managing directors at Accenture, both David and Vik have played an integral part in helping companies around the world develop digital transformation strategies and put them into action.

[1:08] Based in Chicago, Vik leads Accenture's electronics and high tech industry practice within North America, where he focuses on using analytics and AI to drive business transformation. He has extensive experience in Industry X., supply chain organization design, and other complex areas.

[1:30] David is based in Japan. He is Accenture's global high tech industry lead. He is responsible for driving the high tech industry growth, thought leadership, client portfolio, and market positioning. David is an expert in rethinking traditional business models.

[1:48] In 2019, he released a book on the topic called "Reinventing the Product How to Transform Your Business and Create Value in the Digital Age." In this episode, David and Vik talk about why digital business models are so critical for success and what companies can do to start rethinking their own products and services for the future of commerce.

[2:14] This is Daniel Saks, co CEO of AppDirect. It's time to decode everything as a service.

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Daniel: [2:26] Welcome to Decoding Digital, a podcast for innovators looking to thrive in the digital economy. I'm your host, Daniel Saks. I'll sit down with other founders, CEOs, and change makers to decode the trends that are transforming the way we work. Let's decode.

[2:48] David, Vik, welcome to Decoding Digital. Super excited today to profile both of your work on as a service business models. As we've discussed on Decoding Digital, the importance of digital transformation is really critical for our customer success.

[3:06] It's not just about the technology, but it's also about the business models that allow business customers to easily consume the services that we're providing. David, I know you actually wrote a book focused on as a service models called Reinventing the Product.

[3:22] I was really excited about the book and the content, but wanted to double click on which companies have exceeded it reinventing their products, and how have they done that through the innovation of business models.

David: [3:34] Yeah, absolutely. First, thank you for having Vik and I on your podcast. We're super delighted to be here. I'll give you a preamble then answer your question. I always talk a little bit about why now? Why now our company is talking about reinventing the business model to as a service? What's different now?

[3:53] First, it starts with the fact you have to acknowledge that to have an as a service model, at least a compelling one, you need a product that's smart, with enough processing power, connected at a high enough bandwidth, and ideally AI enabled.

[4:07] The reality is even five years ago, most of that was not possible. Without 4G, and now soon 5G networking, you didn't have the bandwidth, power, and processors, used to need to have a $500 or a $1,000 device to have enough processing power to have a really smart product.

[4:26] Related to processing power is the sensors, because to really be smart, you need sensors on a product. The reality today is sensors cost pennies. You can get processing power for pretty inexpensive along with the connectivity.

[4:38] As the world moves to smart, connected products, then the logical question a lot of companies ask is, "Do I sell this as a product or do I, when it's connected and it's always being updated and evergreen, why not actually shift the business model to an as a service business model?" That's a little bit of context.

[4:56] Then if you ask, "Who has done this?" I often say to product companies, you might think software companies are a little different than you, but remember, software used to be sold as a CD ROM and sent in a box. The software industry has almost completely pivoted to software as a service in the last five years.

[5:15] There was the born in the SaaS model companies like salesforce.com, but people forget that Adobe was probably one of the first leaders to shift from a traditional software business model to a SaaS business model. A lot of the hardware companies are still on that journey together.

[5:30] A few examples of companies are interesting. Apple still makes most of its revenue from selling hardware, but if you look now, they have a 50 billion dollar plus services business. They've taken that platform and now you have Apple Music, Apple Cloud, Apple TV.

[5:46] You see a lot of hardware companies trying to emulate that. We could probably get in a few more examples as we go through, but that's my simple overview answer.

Daniel: [5:55] What do you think that the product companies can learn from the software playbook on some of the examples that you provided of traditional software companies like maybe the Adobes of the world or the Microsofts of the world successfully transforming? How do you bring that to light in the products that are trying to transition to as a service business models?

David: [6:14] Basically, every hardware company I know is asking this question today of, "Can I and should I transition to some sort of as a service model?" Some people call it device as a service, hardware as a service, infrastructure as a service. There's different flavors of that business model ship.

[6:29] Every CEO I know is asking that question. Again, why? One is because it's technically possible, as I said before, but two, Wall Street rewards that shift that this recurring revenue business model results in much higher valuations and much more durability of revenue.

[6:47] The starting point I often say is this is not a small little tweak to your business. It is a fundamental transformation of your business model, and it needs to be board and CEO sponsored, and you need to think holistically, because it impacts every single process.

[7:01] It impacts how you develop products, how you market them, how you sell them, how you service them. In particular, the software industry did a good job of creating this whole idea of customer success to say, "It's not a one time sale. I now need people who actually think about driving adoption and usage of the as a service business model."

[7:22] As a simple example, that function doesn't exist in a hardware company. There's no such function that says once you sell a product, I think about driving usage and adoption [laughs] and the customer success with that product over time.

[7:36] At the simple level, I say it needs to be a board and CEO sponsored transformation. It needs to be holistic end to end. I know maybe Vik could comment on that. I know you're working with one of your clients that are pretty closely on that shift in business model.

Vik: [7:52] To add to what Dave mentioned, there are a couple of other things that need to be learned. As you make that pivot from a product to a platform as a service or as a service offerings, basically, you need to be also thinking about the agile principle that the software industry has grown into, especially for your architecture.

[8:10] You need to make sure you're doing agile development, because typically, these product companies are very much of engineering focus where you need to get end to end down in a very waterfall fashion. Bring that agile principles in.

[8:23] The second thing is Dave was talking about the transformation. You think about it's full cultural transformation, because today, I'm selling a widget that is hundreds of thousands or millions of dollars and I pay my Salesforce commission based on that.

[8:37] Now, I'm asking people to have a subscription which is maybe only a few 100 a month or a few $1,000 a month. You're changing the mindset. Showing people the value that that's going to bring, the pivot that is going to happen, that's another principle that need to be brought in.

[8:53] The third thing is that this is a dual dynamic. If you look at product forward, what features of your product are going to enable the success for the customer, what value they're going to drive? Market backward, what is the word the market is looking for?

[9:08] Staying close to your customers and making sure you are constantly innovating and creating features in your product that the customer is looking for and having a closer fit of those two.

[9:19] I feel those are some of the other things that, from a software industry, that product companies should be adopting.

Daniel: [9:26] I know, Vik, you've worked with many companies that have gone beyond thinking about how to shift software to as a service or recurring, and even beyond products. How do businesses think about, let's say, bundling product services and other value points to drive this recurring business model strategy?

Vik: [9:45] Absolutely. There are two mindsets that you need to be aware of as the companies are making that pivot. First and foremost, you already have a customer base where you're selling product very successfully.

[9:56] From that customer base, there are some early adopters who want to be in the front end and who want to be with the cutting edge of the new innovation that you are bringing.

[10:05] Take those customers on that journey with you, bring them to co innovate with you, help them tell you what they're really looking for and how you can make their life better. The whole concept of customer experience becomes even more amplified. It's all about customer experience. Without driving that better customer experience, you cannot create a product that is going to be a hit in the market.

[10:30] The second thing to look at is look at your product and look at where the industry is headed. Can I move into adjacencies? Can I move into adjacent industries? If you don't move it, someone else will do that, because your product will become as a source of what happened to some of the telcos. It's like they've had what they call the fiber, but it's a dumb pipe, because it's just used for the data.

[10:53] There were companies who were coming and building OTT platforms on top of that, or plugging applications in that can drive the benefits. You want to have incentivized people to innovate and come into your architecture and innovate with you and layer on top of your platform while making sure that you're also on the cutting edge.

[11:10] You're not leaving it all for others to come in and capture that market share. You want to pick some spots, and then you want to open up other spots for the ecosystem to come in and innovate with you.

Daniel: [11:20] In your work at Accenture, you obviously consult to some of the largest organizations in the world about their transformation. As we saw with the as a service software models, oftentimes, it was the upstarts that figured out how to thrive and become large companies.

[11:34] When you're looking at the next cohort of companies that are trying to transition, how do you advise them on effectively making this transformation, recognizing all the restrictions in their old way of doing things, but also recognizing that they have a great brand? Where do they start from an organizational perspective?

Vik: [11:53] I'll start, and Dave has a lot of experience in this as well. I'd love Dave to build on this thing. First of all, a lot of the clients at this point are like transformation fatigued out at this point, because everything is a transformation.

[12:05] Imagine digital coming at a million miles an hour at them, then the whole need to look for new revenue models. Companies which are doing an agile approach in a way that, "OK, I'm going to pick a couple of products. I'm going to test them in the market. I'm going to scale the success of that, and I'm going to go after in a bigger way," that's number one.

[12:25] Second is, from a cultural perspective, you have to act like a start up while making sure that you are still a large organization. Let me explain what I mean by that.

[12:33] You need to have innovation and you need to have people incentivized to fail fast, but you also need to encourage people to use the infrastructure of the large organization that has been set up.

[12:44] In a start up, you don't have all that infrastructure. You have a strong customer base today. Don't try to go find new customer base, leverage the existing customer base. You have the back office that is already there set up. Don't try to recreate new back office, leverage what you have.

[13:00] Similarly, you have the relationships that are there, so leverage that. I feel that that's the approach that has to be followed. Don't try to do with a big bang. Rather, do an incremental so you can drive that success.

David: [13:12] This is a hard question [laughs] and it varies a little bit by company. The core question to me is, is your existing core business going to be completely disrupted by this shift to as a service in a major way, or is it going to be slow and gradual? Or, is there going to be a segment of the customer population that is interested in this so that you could go a little more slowly, if you will?

[13:38] It's certainly much easier if you could say, "OK, I got this core business. It's going to continue running. It's going to generate cash, while I could build a side business or a new co model to offer new types of as a service business models to my installed base customer."

[13:54] I see a lot of that. "OK, my core business is my core business, but I'm going to try to add on. I'm going to create a new revenue stream by creating some new digital services or digital service models that complement that."

[14:06] If you could do that, that's by far the best. The reality is there's some businesses that are going to completely shift. If you don't say, "OK, this is how my model is shifting and I'm all in," that's the core question. Do you need to, in certain product segments, say, "I'm all in [laughs] and this is the future of my business"?

[14:26] At least in the software industry, eventually, the answer was you're all in. You're all in on SaaS and the old shrink wrapped software on a CD ROM in a box is, in many cases, gone, [laughs] or on the way to being gone.

[14:40] You've got to ask yourself that question. "Is this something that can compliment and my core business is fine from there 5 or 10 years, or is this really something that's going to cause me to have to actually completely flip the switch?"

Daniel: [14:53] What are some examples in the product economy that you think are well suited to go all in?

David: [15:00] I'm going to give you a couple of examples. It hasn't quite flipped yet, but the automotive industry is getting close to that world. You say Tesla has proven what is a car.

[15:11] A car is basically a computing platform and software [laughs] with four wheels on it, in the sense that a Tesla car and others like it are very much an evergreen platform that's continually upgraded and updated. The reality is the Tesla car that you have today is a better car than three years ago.

[15:31] In the history of the world, that has never been true. [laughs] If you bought a product three years later, is it a better product? It's only when you can have this, what I like to call an evergreen, meaning it's a continually upgradeable platform that you can improve features and functionality over time.

[15:47] You're starting to see this world already, where people like Tesla are saying, "Well, I'm taking the first baby steps, so I'm going to charge you for upgrades so you want to pay for autonomous driving. That's more of an upgrade package."

[15:58] They, and others, are very much talking about, "Well, why don't I move all the way to an as a service model for access to vehicles at any given time?" That's one interesting area that everyone understands.

[16:10] The PC industry might be on the verge of making this shift. A lot of the laptop companies are basically saying, "Well, you're going to upgrade this product every three years anyway, so [laughs] why not try to find some ways to make this an evergreen as a service business model?"

[16:27] I do believe there's going to be a number of segments that will, 5 or 10 years from now, flip a switch, and then the question is, is it going to be happening in a 2 year window, or is it going to take 5 or 10 years in order for the switch to fully flip?

Vik: [16:42] Let me build on what Dave said, give another example, which is around the concept of software defined hardware upgrades. I have a Tesla, and each month, I get a new feature, which almost makes it like I'm getting a new car.

[16:56] Imagine someone who wants to get a new experience in the car and you have to go in, and I got to change the seats, and I got to get this. Everything is an upgrade here. A lot of these upgrades are being constantly pushed out to the customers.

[17:10] Now, that almost creates the newness of the product and keeps that hook in on the customer. The day is not far for I know some of the car companies are already trying that car as a service, where each six months, each year, you can go and drive in a new car. Obviously, it's expensive, but if that's the lifestyle you want, the option is available.

Daniel: [17:30] Fantastic examples and ones that everyone can relate to. What I've seen from interacting with a lot of our clients is that in order to drive these all in transformations, it takes more than just the technology. It takes a cultural shift. What are the characteristics that you've seen in leaders who have been successful at driving all in change?

David: [17:52] First, it needs to start with the recognition of what you just said. This requires not only a business model transformation but a cultural transformation. The reality is traditional, particularly product hardware, companies have culture and processes that were built 20 or 30 years ago for a different world. They were built for very much a...

[18:13] I launch a new product once a year. It's a transactional sale. I sell it to a distributor or to a retailer. Then maybe I have a warranty card that tells me who my customer is, but I don't really have any ongoing relationship, in a meaningful way, with that customer.

[18:27] To actually adopt and say, "I now need to actually have the mentality of a services company," to say that the product is just a way to create a footprint to facilitate an ongoing services relationship is a dramatic cultural shift. Trying to get all the organizations to actually understand and be metric ed on things like adoption, not just customer satisfaction but adoption and usage of the features of the platform.

[18:55] That's an example, again, I think you can get some inspiration from the software industry to say, "Hey, I'm actually measuring my people and creating some of the compensation and the visible metrics tied to usage and adoption and advocacy for the platform."

[19:10] That is just a massive shift. It's just not something that traditional...Product companies' culture is just not geared that way. They're geared to design a product and launch it and then move on to the next one.

Daniel: [19:22] Definitely, this all in decision is huge. It requires a cultural shift, a transformation, a business model trend. You have to go all in. Going partial in on this strategy could create friction, confusion.

[19:33] What's the balance of saying, "OK, we have to do this. We have to go all in. We have to go fast," versus letting them take their time and overthink it? Then three years go by, five years go by. A startup is eating their lunch.

Vik: [19:48] We as consultants have to recognize that the pace at which we move is actually much faster than the pace at which our clients want to move. You have to lay it out for them and then let them make the decision.

[20:02] What happens is when they make the decision with all the data that you have given and you guide them through their decision, it's a better decision versus a decision that gets forced on them by even their own leadership. The leadership buys in. The CEO, let's say, buys in. The organization doesn't buy in.

[20:18] To some aspect, you have to have the right deliberation to get that right consensus. Then the leadership goes back into the all in. Once you're on this journey, you're all in. You have to stay patient and you have to stay persistent on this journey. You can't just turn around in six months and say these things are not happening fast enough. To turn around a ship, it takes time, versus like turn around a car.

Daniel: [20:40] I feel this trade off between speed and also management of expectations. One of the things that I found is that at a bigger organization, people who are working on an innovation project do need quick wins to build or showcase progress, but at the same time need the support from the larger organization in order to adopt it in a reasonable timeframe.

[21:02] How do you balance this need for speed with the reality of managing expectations to drive overall transformation?

David: [21:10] First, I'd say that it's not easy, and is also linked to this comment before. Is this whole market going to flip a switch, or is this going to tackle a segment of the market? If the whole market flips a switch, the actual P&L and cash flow of a company has a dramatic impact. The CFO and the CEO need to think really hard to manage Wall Street's expectations and the employee base expectations.

[21:33] The transition period is going to be very painful, because you actually are going to have revenue go down potentially for a period. Instead of just selling a product for a thousand, as Vik said, you're going to sell in as a service model and next year's revenue is going to be $100. That transition period is pretty painful.

[21:51] If you think you need to do it all and switch, you need to actually have the right clarity of messaging to all stakeholders, to Wall Street, and to your employees and make sure that you understand that transition period is going to be a challenge.

[22:06] Even if it's the second model, which says I could start with a segment of the customer, here, a great example is light bulbs. I always joke if you can think of one of the world's dumbest products historically, it's a light bulb. It's a piece of glass with a filament inside. There is not much to a light bulb.

[22:23] Today, if you look at a smart, connected light, I talk about it in the book I wrote around Signify's example, the old Philips Lighting, where they created the Hue platform. It's an LED light that's based on semiconductor technology, but you can control it and access it remotely via your smartphone. That actually ends up being a segment of the population.

[22:42] Say there's a segment that's willing to buy this higher end, higher functionality smart, connected lighting, even then, in order to build that, you need to ring fence significant investment dollars to say this may take a while to build this. How do I create that investment envelope with a commitment to protect that investment envelope for a multiyear period in order to build that business?

[23:07] There is a two speed model. There's the flip the switch version and there's the, "Hey, I can actually have a complementary new business that is going to lower my financial performance in the short term, [laughs] so I need to protect it. It has the potential of actually being significantly more profitable in the long term."

[23:25] It's a very hard balance to make. It's super important to be very explicit in your messaging and in your financial planning.

Daniel: [23:33] We've talked about the opportunity to go all in on as a service business models. We've talked about the need for cultural change and the leadership characteristics and dynamics to ensure that that change can be successful and the way to manage expectations of the teams.

[23:47] Let's take a few minutes to double click on the technology. As a product company is looking to shift to an as a service model, there's obviously a whole new tech stack that can enable the commerce, and the metering and monitoring, and subscription enablement, and the user interface, and the ecosystem.

[24:06] Can you speak to some of the challenges that a business might have on sourcing this technology and getting going with adopting new technology to make this shift?

David: [24:16] First, what you just said is absolutely true, that underlying technology platforms that product companies have built were built 10, 20, 30 years ago for a transactional product sale.

[24:28] As they've launched, particularly if they launched more of a skunkworks or pilot effort around as a service, [laughs] they used some bubble gum and mailing wax [laughs] to enable it. The reality is they can't do many, many things.

[24:41] They don't have systems that allow you to have a customer self configure an as a service solution. You go in, you want to buy a product, you want to pick which features and functionalities that you want in an as a service solution and configure it and buy it directly. They don't have that.

[24:58] They don't have the ability to track the entitlements to say, "Well, OK, this customer bought something with certain access, service entitlements," which is quite common in the software industry. This idea doesn't exist. [laughs] What is the entitlement rights?

[25:12] The notion of doing ongoing monitoring, yeah, sure. Maybe they did some break/fix monitoring, but they didn't track usage and adoption. How are you now tracking much more larger amounts of data from the installed base to understand the usage and adoption around it? It's a pretty massive change.

[25:33] That's why we see a lot of clients right now saying, "OK, if this is going to be the future of our company, we now need to do an end to end business process and technology architecture review and yes, basically come up with a completely new technology stack, ideally, that supports both the old business and the new business."

[25:53] The old models aren't going to go away, so you can't easily afford two separate sets of IT systems and technology platforms. How do you think through your core systems to enable traditional product sales, standalone services sales, as a service sales, other types of subscription business models?

[26:10] It's possible, but it's a lot of work. [laughs] I'm spending a lot of time with several clients right now plotting out that technology architecture of the future.

Vik: [26:18] The only thing I would add to what Dave said is that if you have a solution in the market that is readily available, go with that, rather than try to create a solution on your own. Or, when given a choice, go with the out of the box solution versus trying to customize.

[26:34] Right now, there are several solutions available for the back office as well as some of the capabilities you need, leverage them. That's the only advice I give to the clients.

Daniel: [26:45] When you're thinking of a client and how they picked, Vik, to your point, an effective best of breed out of the box technology, how do you help them assess if their traditional IT stack can map to that new stack and how that works?

David: [26:56] I'm doing this right now [laughs] with a client, and one of the things we're doing is forcing them to think through 15 or 20 different use cases or user stories of the future. Probably, 10 or 12 of them exist today.

[27:09] They don't necessarily exist in this client, but we're saying, "OK, there's many different flavors of as a service." [laughs] Forcing them to think through, what is the evolution of all the different business models and permutations of business models that you could imagine offering in the future so that you could future proof?

[27:27] Often, these are pretty big ticket investments. You're probably easily sometimes talking $100 million or more for a big Fortune 500 or Global 2000 type company in order to enable that tech stack in the future. You want to future proof the investment.

[27:41] In my mind, I always say let's start with, what's the evolution of the customer experience you want? Number one. Two, what are the different business models? As I said, there could be 15 or 20 different flavors of those business models. Then you can pressure test the architecture against that. What architecture choices I make give me the flexibility to evolve my offerings and my business models over time?

[28:03] Some stack choices are great for a narrow, one business model, and if you're quite confident that your future looks exactly like this, you might make one set of choices, but if you're uncertain about how this market is going to evolve, then you want a more flexible architecture that's allowing you that flexibility for the future.

Vik: [28:23] The only thing I would add is that when we are going through the options, it's always good to start with those use cases and do end to end process so you can see how the process actually works and where the gaps are, and then you scale, versus trying to do everything together.

[28:40] Pick a use case, follow the end to end process, and that will actually help you work out the kinks in the process, and then go to the next one, and the next one.

Daniel: [28:50] Just to bring the conversation back full circle, Vik, one of the things you highlighted early in the conversation was around the importance of product companies becoming digitized and connected, and then ecosystems being built on top of them.

[29:03] I recognize that in the traditional economy, product companies furiously competed based on capability and feature set, and it was very hard to differentiate. Whereas today, it seems like companies big and small can collaborate, and partner, and enable different components of the ecosystem.

[29:21] Would love to get your thoughts on coopetition as a future of business and how that impacts the way businesses seek to compete.

Vik: [29:31] When I started my career 20 plus years ago, the thing used to be that in the next few years, it's not going to be companies competing with each other, rather, supply chains of companies competing with each other.

[29:44] The last four or five years, I've started to say that it's not the supply chains anymore. It's the ecosystem of the...how do you build the ecosystem around you and how do you leverage that to drive your growth and transform, is going to define who is going to win.

[29:59] I'm a firm believer that you got to build your ecosystem. You got to pick the right partners, and then you got to go all in, whether it's to build the product, whether it's to scale, or whether it's to drive growth in the market. I think that is here to stay, and we see the various elements of that.

[30:14] If you look at Microsoft, Microsoft is actually providing software to Dell and HP. On the same token, Microsoft also has the product that competes with what Dell and HP have to offer. I feel that, like you said, the coopetition is here to stay.

[30:28] You just need to continue to invest in pockets which can drive benefit for you and know that someone is going to come up with competition, whether it's your ecosystem partner or competition. How you continue to gain and join that? That's real innovation.

Daniel: [30:42] Thanks, Vik, David. This was phenomenal, really great insights into as a service business models and how product companies can transform. I really enjoyed the conversation and look forward to connecting again soon. Thank you.

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David: [30:53] Same here. Thank you.

Vik: [30:54] Thanks, Dan.

Daniel: [30:58] On the next episode of Decoding Digital...

Ray Wang: [31:01] In a digital world, things are infinite. The possibilities are infinite. The opportunity is infinite. The ability for inclusion is infinite. The ability to actually make money is infinite.

Daniel: [31:10] Founder, chairman, and principal analyst at Constellation Research, Ray Wang. Thanks for listening to Decoding Digital. Make sure you never miss an episode by subscribing to the show in your favorite podcast player.

[31:27] To learn more, visit decodingdigital.com.

[31:31] Until next time.

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