But a human-intensive services business is entirely different. In services you donât make a product and then sell it. You sell a capability. You sell knowledge. You create it at the same time you deliver it. The business model is different. The economics is entirely different.
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Finally he pointed out that the economics of a services business were very different from those of a product-based business. A major services contract might last six to twelve years. An outsourcing contract for, say, seven years might lose money in the first year. All of this was foreign to the traditional world of product sales and would create problems for our sales compensation system and the financial management system.
I have worked in services companies (McKinsey and American Express) and product companies (RJR Nabisco and IBM). I will state unequivocally that services businesses are much more difficult to manage.
The implications of this kind of leap to a companyâs economic model can be devastating. In IBMâs case it meant the collapse of gross profit margins and the attendant changes we had to engineer to lower our cost structure without compromising our effectiveness.
Yet the hardest part of these decisions was neither the technological nor economic transformations required. It was changing the cultureâthe mindset and instincts of hundreds of thousands of people who had grown up in an undeniably successful company, but one that had for decades been immune to normal competitive and economic forces.
I came to see, in my time at IBM, that culture isnât just one aspect of the gameâit is the game. In the end, an organization is nothing more than the collective capacity of its people to create value. Vision, strategy, marketing, financial managementâany management system, in factâcan set you on the right path and can carry you for a while. But no enterpriseâwhether in business, government, education, health care, or any area of human endeavorâwill succeed over the long haul if those elements arenât part of its DNA.
You canât mandate it, canât engineer it.
What you can do is create the conditions for transformation. You can provide incentives. You can define the marketplace realities and goals. But then you have to trust. In fact, in the end, management doesnât change culture. Management invites the workforce itself to change the culture.