Value is the lifeblood of the business world.
In the form of improved efficiency, effectiveness, and ultimately, profit, value is the only thing that business-to-business customers are interested in buying. Companies like yours seek to create differentiation and profitable growth by investing large amounts of money and time to create solutions that are capable of delivering value to these customers.
But you cannot transform solutions into competitive advantage and profitable growth unless the customer actually improves business performance and can measure the achievement of the value that has been promised. You could say that you have achieved your goals and can ignore customers’ outcomes when the sale is closed, but that is shortsighted: Customer success is the ultimate source of differentiation and profit.
Your solution’s value capability is not true value until your customer has achieved it. With this in mind, I’d like to pose a question: What percentage of the value capabilities of the solutions that your company creates and brings to market is actually transformed into profitable growth?
I’ve asked this question of senior executives in large and small companies in a wide variety of industries. Invariably, they aren’t entirely sure how to answer the question. Most of them don’t know what percentage of the value capabilities inherent in their solutions can be achieved by their customers and, as a result, be transformed into profitable growth.
They understand and believe in their solutions, but they have assumed that because a value capability exists, enough customers will buy it and be able to achieve it, and therefore, it will reach their bottom line. The flaw in this assumption can be summed up in two words: value leakage.
Who Knows Where the Value Goes?
An easy way to grasp the concept of value leakage is to think of the value of a solution as a bucket full of water. When the solution is first conceptualised, the bucket is full. But, as it gets passed from function to function, on its way to the customer value sloshes out. As you will soon see, by the time it reaches the customer it is usually over three quarters empty. That’s value leakage.
Typically, the sales organisation will take the brunt of the blame for value leakage, since the point of sale is where the results of the value leakage are most evident. However, the issue to examine is that the sales person is actually left with very little value to sell. In fact, as you will see next, we are finding that over 80% of the value leakage has occurred by the time the solution is handed off to the sales person.
Value leakage can begin from the very first glimmer of a new solution. This is because a solution’s ultimate value is highly dependent on how well connected its creators are to the problems and opportunities that exist among their intended customers.
Value leakage continues into the next stage in the value network – design engineering. In an ideal world, the designers add value capabilities to the solution by bringing the solution concept to life and refining it. In the real world, however, actual value often leaks away from the solution as the designers make trade-offs for the purposes of cost, quality, timing and price without a clear understanding of the impact on the customer.
Again, the less connected designers are with the solution’s intended customers, the more value is at risk. Now, the solution moves into production, where it runs headlong into the limitations of the manufacturing and purchasing processes. Value continues to leak as manufacturing demands design changes to force-fit the solution into its existing facilities and assembly lines, again without understanding the consequences.
More value leaks as procurement chooses low-cost suppliers for components and subassemblies, and grapples with delivery constraints. Next, the solution moves into marketing, where the marketing communications and sales collateral required to attract customers is created. At this stage of the value chain, the leakage becomes more insidious because the investment to create the solution and its value capabilities has already been made and paid for.
If the company’s customers cannot see how to transform that potential value into reality, or if they can’t determine why it is more valuable than a competitive offering, they will not buy your solution. Losses will begin to mount, and sometimes the company’s very existence can be threatened. The value leakage in marketing all comes down to one root cause: the solution’s value is not connected and quantified in a tangible and relevant way to the customer’s world.
Sometimes this is because marketing places too much focus on meeting or exceeding competitors’ claims; sometimes it happens because marketing is too focused on the features and benefits of the solution itself or generic value messages. In both cases, the mistaken assumption is that customers will be able to translate and differentiate the messages from competing messages in the marketplace and, as a result, will seek out and buy the solution.
Instead, value leaks because competing solutions look and sound the same to customers who do not understand cost – and the downward spiral to commoditisation ensues. The value connections that marketing misses are invariably amplified in the sales organisation. Value leaks because product-based sales training tends to be focused on long lists of features and benefits or generic messages.
More leakage occurs as sales people fail to comprehend the full value impact and present these generic messages to customers using conventional sales processes. Meanwhile, as in marketing, the efforts and resulting success to connect and quantify value to the customer’s world in tangible and relevant terms is sub-optimal. And, of course, customers are only willing to pay for the level of value that they are able to comprehend, which is usually far less than what the sales person attempted to communicate and certainly less than the original designers envisioned.
If the sale is closed, the support and service functions work with customer companies to implement solutions and achieve their value. This becomes a struggle because customers often do not fully comprehend the value capability of the solutions they buy or the constraints that can keep them from achieving the value. So, more value leaks as implementations fail and unexpected costs are incurred, leading to frustrated customers and damaged relationships.
As a result, the seller is unable to convert the sale to brand equity, referrals and repeat business. This may sound like an overly bleak assessment of how and where companies leak value, but it is not an exaggeration. When Prime Resource Group tracks value leakage in client companies, we typically find that the companies are identifying less than one-half of the value that their solutions can actually deliver and they are able to quantify less than half of the value that they can identify.
This suggests that the average business-to-business seller is going to market with 70% to 85% of the potential value of its solutions already lost. What makes this issue even worse, is that the 15% to 30% that they were able to clarify, is likely to be the same 15% to 30% that their competitors have clarified. This compounds their commoditisation challenge. The results of these analyses tell us that the requirement to clarify value by connecting it to customers’ performance metrics, and quantifying it, is not limited to the sales function.
Business-to-business sellers need to sharpen their focus on value clarity and enhance customer value achievement in ways that are relevant and tangible by addressing value from their customers’ perspectives.
Diagnostic Business Development®
Prevents Value Leakage
You can substantially enhance your company’s sales results by developing Diagnostic Business Development® into a functional capability that will enable your sales organisation to help customers clarify and achieve value, but sales is only responsible for a short portion of the value chain. It cannot maximise value on its own. The sales organisation does not create solutions. It does not procure the materials and services
that go into the solutions.
It does not manufacture solutions. It does not control the marketing of that value or the support services that ensure that customers will achieve the value they have purchased. All of these activities affect the flow of customer value and the ability of your company to convert the value it brings to market into profitable growth. Here’s how Kris Robinson, vice president of HP’s recently established business intelligence unit, describes it:
“It’s not just about how you sell. It’s the whole end-to-end alignment of the organisation from a strategy perspective, from a marketing and value proposition perspective, from a portfolio perspective, from the perspective of sales execution, technical support, consulting and delivery, and whatever else you do. If you miss one of those pieces or a function has not bought in to the direction that you are trying to go, you can waste a lot of cycles trying to move the organisation. You really have to get very, very strict upfront on understanding and defining your value capabilities and your differentiation.
“For these reasons, if you really want to optimise the value that your company brings to market, you need to develop Diagnostic Business Development® into an organisational capability. An organisation-wide Diagnostic Business Development® capability prevents the erosion of value because it positions the customer as the focal point of all activity throughout the value network, and customer value (net profit) as the primary driver of business performance.
It is effective because it ensures that everyone in the company understands the value requirements of the company’s intended customers and how those requirements are connected to the value capabilities of the solutions it is bringing to market. The development needs for a Diagnostic Business Development® capability vary with each function along your value network.”
Research and Development
Traditionally, R&D has been guided by an egocentric principle, ‘If we build it, they will buy.’ It tended to be driven by either technological capacity or the desire to out-innovate the competition. The result? Over 60% of potential new products never reach the market, and of those that do, about 40% fail to fulfil expectations.
Today, R&D needs a new governing principle: ‘‘There is no such thing as a solution without a quantifiable problem that clarifies customer value.’’ R&D must develop new products by first understanding the value drivers and performance metrics within the customer companies, and only then, move from the customer to the lab. This approach does not require that the customer be able to describe the new solution idea – or even the problem that the solution would address; I would never advocate self-diagnosis.
What I am saying is that any potential new solution must have a demonstrated value connection to a real customer. As HP’s Kris Robinson says:
“It’s very easy to define your solution portfolio in the context of what competitors in the market are doing. You look around and say, ‘Well, these guys are doing this and it sure would be easy to build a story around that because we can do it, too.’ The real magic is when you define where you think the customer can go and what’s next, and you’ve got a defined process to help them get there. Then, you can get them to buy into the future state by solving the problem in manageable chunks.”
It’s also not enough that a new idea for a solution impacts a single customer business driver in isolation from the customer’s larger business. For example, a client company that designs and manufactures scientific instruments developed an innovative piece of test equipment that was able to test samples seven to nine times faster than any other instrument on the market.
The only problem: it far outstripped the throughput capacity of the process used in customers’ labs, so customers could not achieve the value capability of the instrument without making expensive changes to their internal processes. Not recognising the constraints your customer must resolve to achieve the full value of your solution can be a huge source of value leakage. Recognising those constraints and providing the ability to resolve them is a powerful source of differentiated value.
Marketing
Traditionally, the role of marketing has been to communicate the value that companies intend to deliver to market. The marketers would develop a value proposition, and then package it in advertising, promotional and PR campaigns, and sales collateral that described the features, benefits, and value of the solution. These materials tended to focus on the bright future that the customer would enjoy after purchasing the solution.
Today, business-to-business sellers can no longer rely on customers to interpret that communication and make the connection between the value capabilities of the solutions and their value achievement. Sellers need to guide their customers to an understanding of this connection, and this guidance begins with marketing.
Thus, marketing’s primary role is to clarify value. This requires developing the system, skills, and discipline needed to connect each facet of a solution’s value to the specific performance measurements in the customer’s organisation and develop the means for the sales force to quantify that value in a collaborative manner with the customer in such a way that the customer will ‘own’ the resulting financial impact.
Marketing continues to develop sales aids and collateral, but with several key differences:
- Marketing materials must be much more targeted – to both market segments and to specific job responsibilities and performance metrics of executives within companies in each segment.
- Marketing materials must establish the foundation for a diagnosis-based, customer engagement flow that begins with a value hypothesis and asks the customer to consider the existence of evidence of the risks he or she may be facing (the negative present) before proceeding to his or her rosy future (the positive future).
In other words, marketing should change its focus to the indicators of the business problems or opportunities that its solutions address.
Pre-Sale Technical Support
In the past, most business-to-business products and services were generally not complex enough to require formal pre-sale technical support. That has changed as solutions have become increasingly complex. In response, some companies have created sales teams in which the sales professional is responsible for the establishment and maintenance of the customer relationship and a pre-sale support specialist manages the solution demonstration and presentation.
When technical support professionals play a key role in sales engagements, they must also understand the system, skills, and discipline of diagnostic Business Development ®. Support professionals must recognise that their role during the diagnose phase is to assist in conducting a thorough diagnosis, and in the design phase, they must assist in the collaborative effort to design the optimal solution – as opposed to simply presenting and explaining solutions.
Post-Sale Support
Traditionally, support has been a fundamentally reactive function. When something failed, the customer called and support fixed it (usually for a fee). Over time, this repair service evolved into the service contract, which was sold with the solution. Later, when the ‘‘hunter-farmer’’ model of account management began to emerge, support was often assigned the role of the farmer, who tilled and harvested existing accounts.
In today’s complex market, however, support needs to play a more proactive and integral part in value design and delivery. Support professionals should be involved in the design phase of the prime process, and often should be given lead responsibility after the deal is signed in the deliver phase – ensuring that the customer achieves maximum value from the solution and is quantifying the value as it is achieved.
Because support professionals also tend to have regular and ongoing contact with the customer, they should also be responsible for monitoring the customer for the presence of new indicators that need to be addressed.
One of our clients, a supplier of industrial gases, found many opportunities for new sales to existing customers when it put its delivery drivers through Diagnostic Business Development® workshops. The drivers were taught how to spot indicators – physical symptoms of problems that this company could solve – as they made their deliveries to existing customers.
Because they had broader and more regular access to customer operations, they were highly effective in spotting new business opportunities and passing that valuable information to the sales force. Support functions, such as human resources and procurement, and a company’s leadership team are also instrumental in creating value and converting it to profitable growth. Thus, they should also have the capacity to use Diagnostic Business Development®.
Human Resources
Traditionally, human resources has been a compliance function. It hired and fired employees, made sure that their paperwork was properly processed, paid and taxed them, and promoted and sometimes fired them in accordance with the myriad laws and regulations.
Today, HR has a much more critical role as the organisation’s chief talent developer and manager, and a centre of excellence for capability building. In these roles, HR is responsible for fostering a Diagnostic Business Development® culture within the organisation. It also plays a key support role in ensuring that every function has the right talent in the right place at the right time. HR needs to understand the system, skills, and discipline of Diagnostic Business Development® in order to establish a hiring profile and clearly describe the job requirements to candidates.
This is especially important in sales, where HR can help shape the sales force itself – facilitating the outplacement of sales people who cannot or will not adopt the Diagnostic Business Development® approach (this can be 20% to 30% of the sales force, in my experience), and helping sales leaders recruit, develop, and retain sales professionals who can flourish in the new environment.
Procurement
Traditionally, the role of procurement has been analogous to the immune system in the human body: It was charged with protecting the organisation from opportunistic outsiders (typically, sales people) and obtaining the materials and components needed to create solutions at a cost that maximised the company’s margins.
Procurement accomplished this by adopting a standardised one-size-fits-all buying process that forces all those who wanted to do business with the company into an apples-to-apples comparison, whether they were selling paper clips or scarce resources of strategic importance. This focus on insulating the organisation from the outside and driving down suppliers’ prices has been proven shortsighted.
It strips value from solutions by cutting off access to high-value innovative suppliers and raises total costs. Instead, the role of procurement should be to optimise value throughout the value chain. Procurement can prevent value leakage between the supplier and the firm by monitoring and managing the value delivered by suppliers. In fact, it can actually help create incremental value by teaching the Diagnostic Business Development® approach to the company’s operational managers and its suppliers, so that the organisation can buy in the same way that it sells to its customers.
Wayne Hutchinson has been implementing such an approach at Shell International. He explains it like this: “You create value in procurement by working with suppliers just as you would create value for a customer in the sales process. We’ve done this with a major supplier of gas turbines that cost tens of millions of dollars. We worked with them to analyse everything from bidding and winning contracts, to the design, manufacture, and installation of the turbines.
“As a result, we cut the delivery time on these critical path components in half, and this has created multiples of the value that simple cost reductions would provide, for both usand our supplier. Now that we’ve won the suppliers’ trust and taught them how to sell to us, we are engaging in exactly the same way to work on reducing other costs in how we work together, again, creating value for both of us.”
