In all sorts of industries, companies that traditionally have made and sold stand-alone products are changing their strategies. They are creating high-value solutions by integrating various products and services—even merging the supplier’s and the customer’s operations—to solve a complete customer problem. IBM, for example, takes this approach when it builds and runs the entire infrastructure of a business-to-business e-marketplace for the chemical industry.

Solutions are proving lucrative for many companies, even as the profitability and growth of their products have come under pressure. In the case of IBM, $38 billion of its revenue—43 percent of the total—now comes from the solutions-related businesses it has developed since the early 1990s. The market rewards this growth generously, seeing it as durable shareholder value built upon hard-to-copy capabilities, light capital investment, and customization that resists commoditization. Thus IBM improved its market-to-book ratio by 600 percent between 1990 and 1999.¹

Getting it right

But it is mighty hard to get solutions right, and many companies fall far short in the attempt. Throughout the 1990s, Xerox promoted itself as a "documents solutions" company but struggled to execute successfully in making the transition. Hewlett-Packard wrestled with three attempts over a decade to integrate its full range of products and technical capabilities into customer solutions.

One company that is currently trying to make the transition is Cummins India Limited (CIL), a subsidiary of US-based Cummins. CIL has long dominated the market for diesel engines in India. In the late 1990s, when the opening up of the Indian economy began to dent CIL’s profit margins, the company started to develop solutions: commercial customers were provided with dependable backup power, for example, to cope with the country’s unreliable electricity grid. CIL’s managers and engineers had concentrated for decades purely on the performance of the company’s diesel engines; now these are just one part of its new solutions, for which the management imperative is to integrate a number of products and services. CIL’s chief executive officer, Ravi Venkatesan, says that his organization must "cross a chasm."

Why is it so difficult to make the shift? The trouble is that the very strengths of a good product-focused business can hinder its efforts to become a successful solutions provider. Companies, like IBM, that have succeeded with solutions—and those, like CIL, that are still grappling with them—have taken some profound strategic actions that go against the grain of existing product businesses. Four actions stand out.

Build value propositions for customer outcomes

When product-based companies develop their value propositions, they generally start with the products they have and match those products to the customers’ needs. If a customer wants something new, a product feature is added or a new product developed. At CIL, product managers might redesign an engine part to improve its reliability or add a new engine model with a horsepower rating suited to a certain application. But the nature and range of the needs that can be met are ultimately bound by what can be embedded in the product itself.

In developing solutions, managers start with a desired outcome for a customer—an outcome that could encompass a range of needs

In developing value propositions for solutions, a different approach is required. Managers start not with a product but with a desired outcome for a customer—an outcome that could encompass a whole range of needs. For CIL’s power solutions customers, the desired outcome of uninterruptible power depends on far more than a reliable engine. The solutions manager must understand each customer’s operating economics to determine the value of uninterruptible power, pull together all the components of the required generator system, work it into a customer’s operating environment, and develop maintenance and testing programs.

This is new ground for product organizations. The skills required are far broader and the accountability assumed far greater when success is ultimately measured by a customer’s improved business performance rather than by a product’s performance to specifications. The first reactions of many CIL managers to power solutions were "polite nods with no sign of comprehension." To force the organization to "think back from the customer," Venkatesan publicly committed CIL to the new direction by forming a council of major customers and announcing that the power solutions business would be demonstrated at a major exhibition in Delhi just a few months later. The demonstration was duly held.

Include strange bedfellows

For a company that is used to being self-sufficient and protecting the integrity of its brand, facing up to the fact that other companies could play a part in a solution is a wrench. But solutions providers must become intimately linked to parties with which they had previously done little or no business. Suppliers, distributors, customers, and—the acid test of a true solutions provider—even direct competitors may have an important role to play in providing products, services, skills, market knowledge, and customer relationships. IBM sometimes specifies HP or Sun Microsystems servers as components within its solutions, to the detriment of its own Server Group, whose sales are under pressure from Sun.

Even harder to accept is the need to share closely held financial information and design data with these bedfellows and, for all parties concerned, to be openly critical of one another’s performance. In addition, a delicate touch is needed to deal with shifting strategic relationships, such as those between CIL and the manufacturers of the generators it includes in its power solutions—companies tempted to enter the solutions business themselves.

Choose your customers

The best customers for solutions may not be existing customers for products; they may be upstart companies that look to others to manage noncore pieces of their business, have no established loyalties, and are open to productive partnerships. The discomfort for solutions providers lies in having to step outside their existing networks and to develop relationships with these new (and sometimes very different) parties, as well as in the hard work needed to keep their capabilities ahead of their clients’. Corning Cable Systems faces this challenge as it moves from providing fiber-optic cable to offering complete optical-interconnection solutions. To work with the customers for such solutions—the builders and operators of server farms and Internet data centers—Corning must learn to deal with these "e-heads" as opposed to the "Bell-heads" of its traditional telecommunications customers.

In the end, the solutions provider might decide to walk away from some of the oldest, biggest, or most prestigious customers it has

Changing the basis of a company’s relationship with its customers may alienate some of them and upset the company’s own employees. In the end, the solutions provider might walk away from some of its oldest, biggest, or most prestigious customers.

Guarantee delivered value

A broad guarantee is often the best way of persuading a customer to pay a premium for a solution (see "Putting a price on solutions"). Take another CIL solution: truck maintenance for mine operators. Rather than simply warranting engines for 5,000 operating hours, CIL promises 85 percent vehicle uptime and earns very attractive margins in return. But such guarantees require solutions providers to assume risks normally borne by the customer—a big leap for product organizations, which generally seek to minimize risk.

Sometimes these risks are market risks, as when Enron offers price guarantees as part of its total energy supply, service, and management solutions for industrial customers. More often, the risks deal with organizational performance: the solutions provider guarantees that many parts of many different organizations will work together effectively. In CIL’s case, this pledge involves taking bumper-to-bumper responsibility for every component of the mining trucks, managing a round-the-clock service across a network of mines, and working closely with equipment makers to develop the necessary capabilities. Consider how difficult this can be for a traditional product company, in which the prevailing attitude is, "Tell me what I’m accountable for; give me what I need to do it; and leave it to me."

The need for uncomfortable organizational change

Even when product-focused companies do summon the courage to develop a solutions strategy, their organizations often fail them. Product organizations are grooved for products, an alignment usually formalized in a product-based business unit structure. These units have their own business plans, resources, channels, and customer relationships; status and power bases are built on the units and their products. To succeed with solutions, companies have to turn this organizational approach on its head: they must question product-focused business practices, scrutinize existing customer relationships, and crisscross established lines of accountability.

Many have stumbled. HP’s MC2 solutions strategy aimed to integrate electronic measurement (M), computers (C), and communications (C), but the company’s dominant product lines, intent on their own product growth, resisted participating and tried not to involve their own large customers, which were supposed to be part of the solutions initiative. HP was based on bottom-up innovation, stand-alone products, and many independent business units. It had no space for an integrative, top-down initiative to deliver the whole company to the customer.

Successful solutions providers, including ABB, IBM, and Nokia, have ridden out the discomfort and realigned their organizations. They have formed strong "front-end" units responsible for developing and delivering integrated solutions, refocused product business units as "back-end" supporters of solutions, and developed "strong centers" to mediate between the two (Exhibit 1). At IBM, for example, the product business units for PCs, servers, software, and technology still sell direct to some customers but have also become internal suppliers to the company’s newer solutions units,² which serve industry-based customer segments such as banking, insurance, and manufacturing. Another back-end unit³ works to turn products into solutions. To manage relations between the two types of units, IBM has defined new central functions, including finance centers to manage solutions and transfer pricing, as well as regionally based leadership groups to allocate resources.

Forming strong front-end solutions units

Product business units feel the pain first, when they lose control over the accounts of customers targeted for solutions. New front-end units, given profit-and-loss-type responsibility, are formed to develop and deliver solutions for such customers. These front-end units, with their focus firmly on solutions, are new creatures in product organizations in several ways.

First, they have no product responsibilities or even loyalties. They source the products and services for a solution from the back-end product units and, quite likely, from outside parties as well.

Second, they are staffed with a broader range of talent than is normal in product sales and marketing organizations. Nokia’s front-end Customer Operations unit, which supplies turnkey systems to wireless service companies, includes consultants with deep experience of the customers’ business who try to ensure that the solution makes customers more competitive. Meeting these staffing requirements can cause organizational stress: young, open-minded people are hired from the outside and leapfrog older, less flexible staff. Toughest of all can be finding unit leaders who are both talented business builders and effective negotiators with senior managers inside and outside the organization.

Third, these front-end units are amorphous. They configure and reconfigure their teams according to the project and its various stages.4

Refocusing the back end

Existing product-based business units are likely to view the new front-end solutions units as undermining their power and status. CIL was a case in point: before 2000, its product units were the power centers of the organization, controlling all business functions and dictating product specifications and sales priorities to the field. The tables turned with the creation of the front-end solutions units, whose leaders—interlopers from different business cultures hired at unprecedented salaries—had the temerity to criticize Cummins’s product quality, prices, and service. Product managers were accustomed to griping from customers, but they deeply resented hearing it from the new solutions people. They also had to accept losing direct control over the designated solutions accounts and being forced to negotiate and compromise over internal margins in the pricing of solutions packages. Managing these rubs is a critical and delicate challenge because the product units—and, more particularly, the talents of their people—remain enormously important to CIL.

Product units must become more flexible and open so that they can respond to the front-end units’ incessant demands for resources

Product units, beyond swallowing their pride, must make two fundamental shifts. First, they must become more flexible and open so that they can respond to the front-end units’ incessant, competing demands for resources, whether for product experts, test facilities, or information systems. They must also be prepared to collaborate on customer account planning and solutions development and to work with external suppliers to provide needed solutions components. Second, the product units must rethink their business-planning and product-development efforts in order to create more demand for their products in a solutions environment. In part, this involves promoting promising new products and emerging capabilities by showing the front end how those products and capabilities can fit into solutions—a new spin on a familiar product role. In addition, the product units will have to respond to the pull from the front end to tailor products to particular solutions.

Product units can also develop solutions platforms—packages that feel entirely customized to an individual customer but are 90 percent predeveloped and thus capable of being offered to a range of buyers. IBM’s Global Services unit, for example, creates repeatable solutions. It takes ideas developed by front-end industry units and makes those ideas more modular and scalable so that they can be used by customers in many sectors; thus an e-banking solution created for a leading-edge customer has been adapted as a general e-commerce solution (Exhibit 2). The unit’s approach is always to move from one-off solutions to more broadly applicable ones.

None of these shifts means that product units and product excellence are any less important to an organization. The purpose of the front-back split is as much to strengthen the product side as to create a new focal point for solutions. Indeed, the distinction between products and solutions will become blurred as existing products feed into solutions and, once codified and standardized, become products.

Developing a strong center

Extra value will only be realized, though, if the solutions provider has a strong center that adds two essential ingredients to the mix: forceful direction for solutions and effective links between the front and back ends. Without such a center, the front and back will tend to pursue different strategies, to deadlock over priorities, and to pass accountability for solutions success back and forth. A solutions company needs an activist top team, incorporating leaders from both the front and back ends, to drive solutions down through the organization—by, for example, designating accounts for solutions, electing to sell another company’s products, hiring outside talent for key positions, and removing employees who resist.

This activism should not be interpreted as micromanagement. On the contrary, a strong center encourages front-back collaboration, without intervention from the top, through mechanisms such as performance-management systems that assess and reward employees—from front and back alike—according to the success of the solutions on which they have collaborated. And by rotating assignments across units, the center encourages network building, so that collaboration feels increasingly natural for the organization.

Making the changes in strategic thinking and organization that are necessary to pursue solutions will be uncomfortable for CEOs, managers, and employees. But getting a company to face and overcome this discomfort will create an organization that is more dynamic, capable, resilient, and profitable than the traditional product organization.