Sales Implications of Servitization

Sales Implications of Servitization
The Implications of the Servitization Trend
for Selling
Professor Lynette Ryals
Professor Neil Rackham
Cranfield School of Management
February 2012
Acknowledgments
We would like to thank the companies who have shared their complex sales experiences
with us. Some are named in this report, many more are not.
Thank you also to the members of the Cranfield Key Account Management Best Practice
Research Club, whose support enables sales and KAM research at Cranfield.
Professor Lynette Ryals
Professor Neil Rackham
February 2012
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Contents
Executive Summary
....................................................................4
1. Introduction to Complex Servitized Selling ........................................ 6
1.1 A Definition of Complex Selling ............................................................................... 7
2. Impact of Servitization on Business-to-Business Selling
.........................9
2.1 Cost of Selling ...................................................................................................... 9
2.2 Case Study: Impact of Servitizating on the Cost of Selling - Rolls-Royce’s
‘‘TotalCare®’ Concept. .............................................................................................. 10
2.3 Longer Sales Cycles ............................................................................................ 11
2.4 Case Study: Servitization and Longer Sales Cycles– the Case of Rockwell Automation . 12
2.5 Risks of Servitization ........................................................................................... 13
3. How to Evaluate Servitized Selling Opportunities
............................... 15
3.1 Criteria for Evaluating Complex Sales Opportunities ................................................ 15
3.2 Sales Opportunity Desirability .............................................................................. 17
3.3 Sales Opportunity Winnability............................................................................... 19
3.4 Fitting Together Desirability and Winnability........................................................... 21
4. Using Desirability and Winnability to Develop a Sales Strategy
................ 23
4.1 Improving the Desirability of a Sales Opportunity ................................................... 25
4.2 Increasing the Winnability of a Sales Opportunity ................................................... 25
5. Summary ........................................................................... 27
5.1 Endnote............................................................................................................. 28
6. References and Suggested Further Reading
..................................... 29
Articles (see Google Scholar for details) ...................................................................... 29
Books ..................................................................................................................... 29
Websites ................................................................................................................. 30
............................................................................................
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Executive Summary
Business-to-business selling is changing. Steadily and seemingly inexorably, a
consistent trend is emerging. This trend is called ‘servitization,’ which means
the growing tendency for suppliers to differentiate through services rather than
purely through products. This trend has emerged as it becomes more difficult to
differentiate solely on product. Cut-throat competition means that product
innovations are quickly replicated whilst, at the same time, low-cost
manufacturing locations compete on price.
To some extent this trend can also be seen in the consumer market. Consider,
for example, the Apple iPhone and iPad. Whilst both products have quickly
gained a large market share, Apple is constantly fighting legal battles to try to
protect its innovations. These battles are not always successful: for example, its
touch screen technology, is widely used by competing offerings. Meanwhile, its
market share is under assault from cheaper ‘me too’ tablet computers. How
does Apple stay ahead? One way it can do so is continuous product innovation,
but this is expensive and can lead to customer confusion and resistance.
Another way it can compete - and this is a strategy that Apple has used
successfully - is to provide superior service. The Apple stores are designed to
feel friendly, to offer lots of ‘hands on’ experience (rather than products locked
in glass display cases), and helpful advice (there are many assistants who are all
Apple enthusiasts; some stores offer ‘get to know your iPad’ workshops).
In the business-to-business market, there are a number of striking examples of
organizations that are servitizing their offering and starting to offer
product/service bundles. Perhaps the best-known of these is Rolls-Royce, which
made a major conceptual shift a few years ago away from the notion of selling
aircraft engines and towards the idea that what its customers were buying was a
means of keeping aircraft in
the air. In response, RollsRoyce
produced
its
TotalCare® offering, which
includes engine monitoring
and
maintenance
(service
elements) as well as the
engine
itself
(product
element).
(Photo courtesy of Rolls-Royce)
However, adding the service element makes the sale more complex; and
complex sales take longer to explain to customers, longer to negotiate, and
therefore longer to sell. This is even more so where the product/service bundle
is not pre-determined. Sometimes the product itself has to be customized in
some way (perhaps specific software has to be written, or particular features or
functionality added, or the packaging has to be adapted in some way to meet
the needs of that customer). Or the service element might need customization –
in this case, the underlying product might be standard but the services that the
supplier provides are in some way tailored to a particular customer (perhaps
certain research or trials need to be carried out, or tailored training provided).
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Sometimes, both the product and the service element require customization. In
that case, the sales process is likely to be even more demanding, requiring more
meetings with the client and also within the supplier company, all of which takes
time. This means that selling these complex packages is likely to be a much
higher-cost activity, compared with selling ‘pure play’ products or services.
At the same time that suppliers are feeling this upward pressure on the cost of
selling, there is also a perceptible reluctance on the part of customers to pay for
the very customization that they increasingly demand. So, where previously it
was possible to bill customers for development time that the supplier could use
to customize their offering, customers are increasingly inclined to treat this as a
supplier cost, rather than as something they should pay. Customer expectations
are higher, and increasing competition may mean that the supplier feels obliged
to provide service or customization for free, in order to secure the deal. This
puts the business-to-business supplier into a margin squeeze, with downwards
pressure on prices and upwards pressure on costs, combined with the cash flow
issues associated with a longer and more expensive sales cycle.
These
developments expose the supplier to increased risk.
This pattern of longer and more complex and costly sales cycles has profound –
and largely unrecognized - consequences for sales. It means that suppliers need
to be more strategic about their approach to sales opportunities and more
selective about which opportunities to pursue. Moreover, it means that suppliers
need to review their portfolio of sales opportunities regularly, to see which of
them still look like good opportunities. Then they need to make tough decisions
about which sales opportunities to walk away from, because the costs or the
risks are too high. Finally, the sales team needs to think about how it will craft
its offerings to customers, given that customization plays such an important
role.
In this paper we begin by considering the issues relating to complex sales; then
we propose a method that suppliers can use which considers every sales
opportunity as an investment and evaluates each opportunity against two
criteria: attractiveness (do we want this business?) and winnability (can we win
this business?). Finally, we demonstrate how companies planning to servitize or
offer innovative services can manage their sales opportunities as a portfolio.
The ‘sales opportunity portfolio’ provides managers with a way of prioritizing
selling opportunities and of developing sales strategies.
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1. Introduction to Complex Servitized Selling
Western economies now overwhelmingly rely on services. In 2010, services in
the UK and the US accounted for 77% of GDP, with manufacturing representing
just 22%. This change explains the growing interest by suppliers in the practice
of servitization, defined as the bundling of goods, services and support, and
‘know-how’ into product-service.
For many previously product-centric companies, selling - and delivering services is a considerable change. Consider Xerox photocopiers, which moved
from a model which was 100% about selling photocopying machines, to its
current model which incorporates software solutions, document and digital
printing support, and business outsourcing (www.xerox.com).
© 2011 Xerox Corporation and Affiliated Computer Services Inc. All rights reserved.
A key driver for suppliers to servitize is the top line, to generate more revenues
from customers. Servitized deals are typically larger, since it is not just the core
product that is included but also a service stream. Moreover, the revenue from
the deal may continue over a period of months or years, rather than simply as a
lump sum.
The adoption of servitization may be conscious, driven by the perception that the
addition of services to a goods-based offer will facilitate the sale. By contrast,
however, some suppliers may inadvertently introduce servitization as they
‘bundle’ products and services to try to move away from selling rapidlycommoditizing products. In some sales, whether consciously or unintentionally
servitized, there is a process of collaborative co-creation between vendor and
customer. To date, researchers have tended to treat this collaborative cocreation as taking place post-sale although anecdotal evidence suggests that
there is considerable impact during the sales process, since the solution may
have to be developed or customized during the course of the sales process.
However, when it comes to the bottom line, there is evidence that firms are
struggling to profit from servitizing. One reason may be the higher costs of
delivering servitized solutions; firms that are inexperienced at providing services
may find them difficult to cost out, which in turn means that they might be
difficult to price. We have also seen that the cost of selling a complex offering is
likely to be higher and also is increasing, as customers put pressure on suppliers
to carry more of the initial costs of development and customization. But we also
know that at least part of the problem lies with sales. Increasingly, the sales
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function takes responsibility for pricing and for managing delivery. So, the
blame for mispricing or for miscalculation of the costs of delivering an offered
solution often lie at the sales team’s door. For most companies the problem is
compounded by the lack of reliable metrics on the cost of pursuing individual
opportunities.
Still worse, there is evidence that sales people in servitized firms ‘give away’
services as a way of selling the underlying product. This is a particular risk
where the sales person does not appreciate the true costs to the supplier firm of
providing the service he or she is selling. It is all too easy to throw in a service
offering such as a maintenance contract or some technical support, without
understanding that the implications could be long-lasting and the costs might
accrue for years to come. Traditionally, the responsibility of the sales person
ended at the point of sale. In the new world, the sales person is involved long
after the contract is signed, and has a far greater role in managing the ongoing
relationship.
Therefore, they need to develop an understanding of the
consequences of the sales offering; in other words, they need a sales strategy.
We begin with a definition of complex selling, and identify three implications:
higher cost of selling, longer sales cycles, and customization which may also
involve co-creation with customers.
Our central recommendation is that
servitizing companies practice sales opportunity selection.
We propose a
method for evaluating sales opportunities and a portfolio approach to the
development of sales strategies.
1.1 A Definition of Complex Selling
The kind of selling we are discussing here is complex business-to-business
selling. In a servitized world, this kind of selling involves selling pure service or
product-service packages. Various names have been given to this type of selling
in the past (systems selling, solution selling, relational selling or partnering
selling are some of the terms that have been used) but, in all cases, they mean
business-to-business selling where the focus is on dealing with a particular
customer issue. Following Rackham (1988) we refer to this kind of selling as
‘complex selling’.
Rackham (1988: 6-11) argues that a complex or major business-to-business
sale has four characteristics: an extended sales cycle; a significant customer
commitment; an ongoing relationship including implementation; and a high
perceived risk for the customer. Increasingly we see a trend towards 21st
century selling where the dominant focus is on solving a particular customer
problem or meeting a specific demand. This entails the development of end-toend relationship management processes as well as the need for the supplier
organization to be highly customer-focused.
Sometimes servitization results in a ‘consultancy’ sell, in which the main focus is
on diagnosing and solving the customer’s problem; in other cases, it is an
‘enterprise’ sale, in which the selling focus is on promoting the vendor
organization as a trusted partner who can work with the buying organization to
define and deliver a better model (Rackham et al., 1995). In either case, a
degree of customization may be involved, since the product-service system does
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not necessarily exist in that specific format before the sales process and the
dialogue with the customer begins. Sometimes that dialogue results in the
customer having to alter their own business processes or the way they do
business in order to accommodate the new offering. These ideas (of offer
development during the sales process, of customization that often involves the
customer, and of adjustment by the customer) differentiate complex servitized
selling from other types of sale.
Therefore, we propose the following definition of complex selling in a servitizing
environment:
Complex selling in a servitizing firm is the
act, or process, of selling pure services or
product-service systems in which the focus
is on providing a solution to a customer’s
(recognized or unrecognized) problem or on
changing the customer’s business model.
Servitized selling focuses on value-in-use.
It typically involves a high level of
customization,
often
co-creating
the
solution with the customer as part of the
sales process.
© Google Images
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2. Impact of Servitization on Business-to-Business
Selling
Servitizing impacts on selling in two interrelated ways: 1) an increased cost of
selling; and 2) a longer sales cycle. These effects are caused by the higher
complexity of selling a servitized offering and the need for customization and
solutions development during the sales process. We next discuss each effect
and provide examples from companies that have adopted this method of selling.
2.1 Cost of Selling
Recent empirical evidence suggests considerable changes are taking place in
business-to-business selling practices. Sales people are taking on relationship
manager roles and are now involved longer-term and end-to-end with the
customer, including after-sales service; they also act as the primary point of
contact. Whilst not confined to servitizing firms, it is likely that this trend is
associated with higher service demands.
However, closer relationships with customers are not automatically more
profitable and in fact there is some evidence of higher bankruptcy rates amongst
servitized firms.
Much depends on the costs of acquiring and keeping
customers; in other words, on the costs of selling and of relationship
management. As we have seen, complex servitized selling requires more input
on the supplier side, not least because of the need for extensive buyer-supplier
interaction and communication during the buying process.
At the same time, business-to-business customer expectations are becoming
more demanding (as discussed in the previous section). The positive news for
firms considering offering more servitisation is that there is evidence that
customers want to buy services, not just products; in fact, research has shown
that business-to-business customers increasingly expect vendors to offer
services customized to deal with their specific issues. This has a consequence
for sales. Effectively, customers are demanding more work on the problem as
part of the sales process; thus, much – sometimes all – of the solution
development is taking place prior to payment. This may require the involvement
of a team of people, perhaps working cross-functionally and interfacing with
other departments within the organization. The higher work demands and the
involvement of multiple people and possibly multiple departments in the sale
mean that the supplier’s investment in the sales process increases in a servitized
context resulting in higher sales costs.
Moreover, servitizing a selling offering is likely to result in a larger and more
complex sale, which in itself can increase the cost of selling through two
mechanisms. We also know that larger sales and more complex sales typically
take longer to complete, and longer sales cycles are usually more expensive.
Some major corporations have started to monitor their costs of sale. An
example of this trend is seen in the sale of large complex medical devices. One
of the divisions of General Electric (GE) is GE Healthcare, which not only supplies
large medical devices but also offers complex services which may entail fitting
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out an entire hospital, including post-installation performance monitoring and
maintenance with GE and non-GE equipment:
“We manage the procurement, logistics, installation,
commissioning and training throughout the duration of
your project… After operations begin, we can provide
maintenance, continuous education and performance
solutions throughout the lifespan of the equipment”.
(www.gehealthcare.com)
In three medical equipment divisions of
General Electric, the cost of pursuing a sales
opportunity almost doubled in the five years
between 2000 and 2005, while the average
selling cycle increased by more than 30%
(source: interviews with author).
© GE Healthcare
So, servitizing means that sales cost more to make, because of:
a greater number of meetings with the customer
higher supplier investment in the selling process
larger, more expensive, more complex offering
Involvement of more supplier people and different departments in the
sales process
For this reason, it is important to note that:
Suppliers adopting servitization experience an increase in their
sales costs compared to their costs of product selling
2.2 Case Study: Impact of Servitizing on the Cost of Selling Rolls-Royce’s ‘‘TotalCare®’ Concept
Rolls-Royce aero engines provides power systems and services for civil
aerospace, defense, marine and energy markets. The group is a global business
with customers in 135 countries.
Its aircraft engines are used by
more than 600 airlines worldwide.
A commercial air engine is an
expensive and complex product,
costing several million dollars and
containing some 10,000 parts.
Taking an engine out of service
for routine maintenance is hugely
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expensive, and unplanned maintenance due to engine problems is even more so.
Rolls-Royce’s ‘TotalCare®’ package effectively ‘rents’ its engines to users, who
pay by the number of hours the engine is in flight. Meanwhile, Rolls-Royce can
collect and analyze data on 3,500 aircraft engines in use worldwide, allowing it
to predict potential failures, optimize engine maintenance schedules, and
improve future engine design.
Data are even collected in-flight, enabling
precautionary checks and advice.
The impact of removing unscheduled
maintenance events was seen recently
during a flight from Singapore to New York
when the flight was struck by lightning.
Rolls-Royce’s service team in Derby was
able to assess the condition of the plane’s
engines and advise the pilot that it was safe
to continue the flight, saving the airline
between $1m and $2m in disruption costs.
(Photos courtesy of Rolls-Royce)
Rolls-Royce’s business model has been transformed, revenues from aftermarket
sales rising from just 20% in 1981 to almost 60% of revenues by 2007. RollsRoyce has achieved a strong market penetration and by 2011 had more than
50% installed share on some wide-bodied aircraft. Most of these engines are in
the TotalCare® scheme; in 2010, 65% of all in-service large engines were
covered by TotalCare®.
Whilst TotalCare® can be sold on its own, it is common for the service contract
to be sold at the same time as the original equipment. Managed well, this can
add to the value proposition for Rolls-Royce and its customers. That said, the
process of selling TotalCare® can be a long and complex one. TotalCare® has to
be sold through account teams, who must work at different levels in the
customer organisation and manage the sales contracts carefully. Moreover,
compared with selling only the engines, selling the engine plus the TotalCare®
servicing and care package has increased the length and complexity of the sales
process. The increased costs of selling TotalCare® were particularly noticeable
in the early days after the programme was first introduced in the mid 90s. More
recently the success of the programme has made TotalCare® easier, and hence
less costly, for the account teams to sell.
2.3 Longer Sales Cycles
Recent research has found that service innovation has an impact on the sales
cycle (the length of time between initial contact and final order placement).
Selling in a servitized world leads to a focus on customer solutions and on valuein-use, because of the importance of defining the problem and understanding
what the customer’s needs are and then developing or co-creating customized
solutions during the sales process. This is likely to result in a longer and more
costly sales cycle in servitized selling than for equivalent-size sales where the
product or service is pre-specified.
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In effect, value is developed during the sales cycle through a dialogue between
the vendor and the customer and the consequent development of the solution.
So, servitizing means that sales take longer to make, because of:
Solution may be developed during the sales process
Conversations may need to involve multiple people and departments at
the customer
Supplier may develop and test offering as the sales process goes along
Contracts may be non-standard, or involve novel pricing methods
For this reason, it is important to note that:
Suppliers adopting servitization experience a lengthening in their
sales cycles compared to their product-selling sales cycles
2.4 Case Study: Servitization and Longer Sales Cycles– the Case of
Rockwell Automation
US giant Rockwell Automation sells both products and services with an emphasis
on the uniqueness of its customized solutions (www.rockwellautomation.com).
A good example of its service innovation is ‘RAAMP’ – Rockwell Automation®
Asset Management Portfolio. In this programme, initial discussions take place
between senior sales people and senior operations people at the customer. This
is followed by an analysis of customer needs relating to their overall
maintenance practice, including repairs and procurement; this audit, which can
take up to a month, is carried out by a specialist in the field of maintenance,
repairs and operations (MRO) who reports to the proposal manager for the
region. The output is a report/proposal that identifies how and where Rockwell
Automation could save money for the customer, for example through warranty
tracking, repair vs. new, in-service warranty, purchase order savings etc.
Delivery is carried out by an on-site asset management service professional that,
if the volume is big enough, Rockwell Automation provides for free or a reduced
fee.
The RAAMP program has been running
for over 5 years in Western Europe
and has been highly successful, with
more than 10 large clients in the UK
and Ireland alone.
The company
recognizes that this is a program that
adds value in specific environments
and is very diligent about the
customers it selects and to which it
commits savings.
© Rockwell Automation
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However, as with the Rolls-Royce example earlier, the sales cycle is lengthy;
currently, from preliminary discussions to sign-up can take a year. In the early
days of the program, when customers were less familiar with it, it took even
longer.
This feature – of initially longer sales cycles followed by some
contraction of the sales cycle as both sales teams and customers become
familiar with the concept – is common to both Rockwell and Rolls-Royce.
Previous research has shown that shorter sales cycles are positively associated
with firm value; by extension, a longer sales cycle could mean, all other things
considered, a lower firm value. In the following section, we examine some of
the risks of servitization.
2.5 Risks of Servitization
Despite the higher sales revenues associated with servitizing, it is a potentially
risky approach for supplier companies to take. The need to invest more time
and effort in a complex sales process is a substantive issue. The average cost
per employee is higher in servitized firms; and there is some evidence that sales
staff tend to ‘give away’ services. In other words, customers are interested in
buying services but firms are sometimes guilty of offering innovative services
but then undercharging for them.
One possible reason for the difficulties that some suppliers have with profiting
from servitizing may be related to increased overall investment needs coupled
with increased risks; both investment requirements and behavioral factors affect
successful servitization. In the servitized context, if customers are unwilling to
bear customization costs, these investments of unpaid time and effort have to be
borne by the supplier.
If the supplier has to invest more up-front, the
consequences of lost sales are more serious because that investment has to be
written off. If a number of different servitization opportunities are under
development at the same time, the overall investment could be very
considerable.
Figure 1 illustrates one of the risks in the current complex sales situation. In the
real world, the customer wants the supplier’s offering to be customized but
increasingly puts pressure on the supplier to fund the development of a tailored
solution. This puts pressure on the supplier’s resources and also on its cash
flow. The real world scenario contrasts with the ideal world (for the supplier) in
which the customer is prepared to fund most or all of the solution development.
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Figure 1: Solution Development Increasingly Precedes Payment
As well as the investment (financial) risks, there are some business risks
associated with servitizing the sales offering. One risk is the opportunity cost of
spending so much time and effort on a risky and complex sale. Because
complex servitized sales typically result in bigger deals, they may look attractive
at the top line, but the chances of winning them might be lower than the
chances of winning a smaller, standard deal. The sales team leader needs to
consider which of his or her team should be engaged in complex servitized
selling and also whether the overall team’s performance could be improved by
altering the emphasis between standard and complex sales.
Another risk is the risk of the unfaithful customer. In this scenario, a customer
pursues a customized sales process with a supplier, encouraging the supplier to
invest in innovative solutions by promising a large order at the end of the sales
process, but then the unfaithful customer deserts the supplier for a cheaper
provider once most or all of the development work has taken place. In effect,
the supplier has funded some innovation for the customer but not been
compensated for that effort.
Finally, there is a business risk for a supplier if it is offering to provide a new (to
the supplier) product or service, since the new offering may fail; this in turn may
cause both financial risk (the customer may need to be compensated and
alternative provision made) and reputation risk to the supplier (word may get
out within the industry that the supplier was associated with a failed project or
installation).
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3. How to Evaluate Servitized Selling Opportunities
The emergence of servitized selling raises the question of how sales performance
should be measured in a world in which the sales meeting does not necessarily
close a sale but may instead contribute towards the development of a solution.
Traditionally, sales effort is evaluated using measures such as call frequency and
sales person performance is frequently assessed on a top-line revenue or
volume quota. However, Rackham and Ruff (1991) find that a larger numbers of
sales calls is associated with greater sales success in transactional (largely
product-selling) situations but is negatively associated with sales success in a
selling context in which the sales person needs to provide more advice and
guidance to the customer.
Sales opportunities arise all the time, both within existing relationships and with
new customers.
The more opportunities the supplier chases, the more
standardized its solutions have to be. But, customization also has its dangers.
The supplier has to use scarce resources in solution development but is exposed
to the risk that, once the solution is developed, the customer will go elsewhere
and look for a lower-cost supplier. Coupled with the distinct possibility that
developing a new customized solution will itself involve unanticipated extra costs
and complexities, even if the customer remains committed to the supplier, the
decision to pursue an opportunity is fraught with risk.
In the servitized situation, therefore, traditional measures are likely to be
inappropriate and the selection of which opportunities to pursue and, therefore,
what business model to adopt, becomes increasingly important. If the supplier’s
offering is going to be heavily customized, volume-based efficiencies (economies
of scale) are going to be rare. This leads to an important proposition:
In complex servitized selling, sales efficiency should be measured
in terms of bid management. Servitized firms that practice
sales opportunity selection will have higher sales effectiveness
than those that do not.
The best sales strategy in a servitized environment is to treat each sales
opportunity as an investment and to evaluate it accordingly.
3.1 Criteria for Evaluating Complex Sales Opportunities
We propose that the special costs and risks of servitized selling, and the
extended timescales, mean that servitized vendors should selectively pursue,
and frequently re-evaluate, sales opportunities based on the following decision
criteria:
Do we want this opportunity (Sales opportunity desirability)?
Can we win it (Sales opportunity winnability)?
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Figure 2 illustrates this approach, showing how sales opportunities can be
grouped into four categories. First, there are the sales opportunities that are
both desirable and winnable (green/green); then there are sales opportunities
that are desirable but difficult to win (green/red); those that are easier to win
but relatively less attractive (red/green), and finally those sales opportunities
that are less attractive and which the supplier will in any case find it difficult to
win (red/red - these might include, for example, selling against an in-house
provider). We will discuss later how this approach can be used to develop a
portfolio of sales opportunities and also to develop the sales strategies that can
be used to address these opportunities.
Figure 2: Decision Criteria for Sales Opportunities
These two criteria for evaluating sales opportunities – desirability and winnability
- are similar to the essential criteria of ‘risk and returns’ used in portfolio
management. However, the definitions that we will use here are wider than this.
As we will explore in the following sections, sales opportunity desirability has
both financial and relational aspects, which are in turn mitigated by some of the
risks of complex servitized selling that we have already discussed. Sales
opportunity winnability is a measure of the probability that the supplier can
successfully win the bid and can successfully implement it, given the importance
of the end-to-end relationship management already discussed.
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3.2 Sales Opportunity Desirability
The desirability of a sales opportunity is largely related to its potential financial
value. The cost of servitized selling raises a substantive issue about whether the
business won is worthwhile. Certainly, there is evidence that some servitizing
companies are able to make only small returns on their efforts. The reasons
seem to relate to higher costs; although solutions are difficult for competitors to
copy, they are also difficult for the originating supplier to develop and
implement.
Moreover, because the specifics of what is delivered may change from customer
to customer, there may be few economies of scale. Therefore, any economies of
repetition may come from pursuing similar types of project. The ability to sell
innovative product/service packages developed from interacting with the first
customer, to other customers in the future, affects the risk assessment (and
desirability) of the first customer through economies of scope.
There is a body of existing research which examines the logic of an investment
decision in a marketing context, particularly relating to the lifetime value of a
customer. Other research has suggested that there is relational as well as
financial value to engaging with customers; thus, the desirability of a sales
opportunity may not purely lie in its direct financial value.
But, some research on sales and on portfolio management has suggested that
there is risk for the supplier that should be offset against the potential value of
winning the project. A frequent result of servitizing is that risk is transferred
from the customer to the supplier, since the supplier begins to provide services
that the customer might previously have had to carry out for themselves or
source elsewhere. The supplier therefore carries both financial and business risk
that was previously borne by the customer.
We have also seen that there is a risk for the supplier associated not so much
with the sales process, but with the subsequent success or failure of the project
and the associated risk of supplier reputational damage. This category of risk
might include teething problems with new processes, implementation problems,
slow learning curve/low adoption rate by customer’s people, or even the need
for modifications or total replacement. The risk mitigation here is not all on the
part of the supplier; the customer’s willingness to adapt to the vendor’s solution,
and to provide guidance about its internal workings and politics, plays an
important role in the eventual success or otherwise of the project.
Thus, the desirability of a sales opportunity has three components:
Financial
Relational
Risk
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Financial Desirability (e.g. the net present value of the opportunity): this is
not the same as the lifetime value of the customer in which this opportunity lies,
since different sales opportunities within the same customer might have very
different desirability. Some sales opportunities are very big indeed, but may not
be very desirable.
Too often, sales people have committed the supplier
company to large but unprofitable deals, simply because they did not recognize
that the financials of that specific deal were unattractive.
The consequences for sales opportunity evaluation are clear. Each major sales
opportunity within a customer should be evaluated individually. It is not enough
to look at the overall profitability of
that customer and assume that every
opportunity in a profitable customer is
a profitable opportunity. This idea is
recognized by sophisticated suppliers,
who understand that they may not
want to pursue every sales opportunity
even within a good client.
We
can
look
at
the
financial
desirability of a sales opportunity
another way, which is to consider the
target share of spend.
In major
business-to-business
selling
relationships, it has become common
for suppliers to monitor the share of
their key customer’s spend that they
command, and therefore the percentage that is going to their competitors. The
share of spend metric (also known as ‘share of wallet’) is a useful indicator of
the true state of the relationship between the supplier and its customer. Some
suppliers scrutinize share of spend very closely, but they may not want 100% of
a customer’s spend on a particular product or service; instead, they bid only for
those sales opportunities that they can service profitably.
Technically, the financial desirability of a sales opportunity does not end with the
direct financial value of that one opportunity. Working with one customer on a
particular project or service offering might open the door to other, future
opportunities either with this client or with others. For this reason, suppliers
sometimes choose to carry out initial sales of an innovative offering at low or
zero margin because the ability to sell versions of the servitized offerings to
other customers in the future gives the supplier ‘skin in the game’, so it has
value. This kind of financial desirability, which is over and above the direct
financial value of that particular sales opportunity, can be measured using a
rather complex financial technique called a real option.
Relational Desirability: there are indirect financial benefits to a supplier’s
customer relationships. These indirect financial benefits include innovation and
learning opportunities, reputation, referrals, and referenceability. Innovation
and learning benefits occur when a relationship with a customer leads to the
development of new products and services that can be sold to other customers;
or the relationship with a customer may result in the supplier learning about how
to improve its business processes and make its overall business stronger as a
18
result. Reputation is the status that may come from association with a particular
customer or project. Referrals are where satisfied customers recommend a
particular supplier to others. This is also known as ‘word of mouth’ and, in some
markets, is considered particularly important to the success of the supplier.
Referenceability is where the customer allows their name, logo or brand to be
linked with that of the supplier, which in turn enhances the supplier’s brand.
Referencing might take the form of a customer name or logo on a supplier’s
brochure, or it might be that the supplier can develop a case study about its
work with a particular customer that is extremely valuable to it in winning new
business.
Both referrals and references facilitate the acquisition of new
customers.
Risk: as discussed earlier in this report, certain kinds of risk carry potential
financial consequences which can reduce the desirability of a sales opportunity.
These risks include implementation risk and reputation risk. Implementation risk
is the risk that a solution developed for a customer goes wrong at the point of
installation. Not only can this trigger compensation payments and the need for
urgent rework (additional costs), it may also result in reputation damage and
consequent loss of business from this and other customers; so, implementation
risk may lead to reputation risk.
3.3 Sales Opportunity Winnability
There has been little research to date on the winnability of specific sales
opportunities. The research that has taken place is usually at the level of
supplier selection and from the point of view of the customer, rather than at the
level of individual sales opportunities that arise within a single customer over
time. What previous research on supplier selection has indicated is that there is
probably an emotional aspect to supplier selection, as well as a ‘logical rational’
approach to supplier evaluation. In other words, there are signs that buyers,
even in business-to-business markets, are influenced by other factors as well as
the purely rational. Unfortunately this customer-side view has not, to date,
been developed into approaches and strategies that can be used by sales people
to enhance the winnability of the opportunities they find within customers.
Nor is it clear who should have responsibility for evaluating the winnability of a
sales opportunity.
Salespeople are proverbially over-optimistic about their
chances of success, so the most objective view of winnability may lie in
marketing rather than in sales. In fact, improved opportunity selection may be
an important benefit from better integration of sales and marketing efforts. In
other words, marketing departments might have a role to play, not just in
providing marketing collateral that would help the sales team to increase their
chances of winning a sales opportunity, but also in helping the sales team to
‘deselect’ the sales opportunities that they should not be chasing. In many
organizations the sales team is still rewarded on top-line revenue or volumes
sold, rather than on bottom-line contribution or margin.
Measuring and
rewarding the sales team on the top line has the effect of encouraging them to
chase every opportunity that comes along, whether it is desirable or not. Topline rewards also make it difficult to persuade the sales team to work on sales
opportunities that take longer to win (such as large, complex sales of the type
that we are discussing here), and make it hard to dissuade the sales team from
19
pursuing certain smaller or marginally profitable opportunities even when it
would be better for the organization if they used their time differently (for
example, on building closer relationships with existing customers).
Winnability is affected by supply-side and by customer-side elements. On the
supplier’s side, the relative strength of the supplier’s value proposition compared
to the competition certainly plays a role in winning a sale. Price is also
important; value to the customer can be defined as ‘benefits minus price’. When
considering their price, suppliers need to be aware that the competition for some
major sales opportunities may come from internal as well as – or instead of –
other external suppliers. In these circumstances the customer may treat the
decision as ‘make or buy’ and there may be a less-than-compelling financial case
for the customer to outsource to the supplier, as well as a lower perceived risk of
using an internal supplier.
On the customer side, a real issue in a servitized selling context is customer
reluctance to engage fully because of the perceived risk of revealing
commercially-sensitive information to suppliers that might, in turn, find its way
to competitors. More broadly, success relates to the readiness and ability of the
customer to buy. This is not just about ability to afford the supplier’s offering; it
is also about willingness to adopt the supplier’s product or service, which may
involve a change in the way that the customer does business. Thus, the
winnability of a sales opportunity has two components:
the perceived strength of the supplier’s value proposition, and
the readiness of the customer to whom that value proposition is
addressed.
Strength of Value Proposition: the strength of a value proposition is contextspecific and perceptual; in other words, it is dependent on how the customer
views it (perceptual), and how strong the competition’s value proposition is,
taking into account the importance and urgency of the purchase to the customer
(context). The customer will also ask itself how compelling the value proposition
compared to the price the supplier wants to charge. In summary, the customer’s
perception of the strength of a supplier’s value proposition is likely to be driven
by both industry- and firm-specific factors. The willingness of the supplier
organization to over-invest in desirable opportunities in terms of extra
customization, solution development and testing may transform a mediocre
value proposition into a winning one.
Customer-Readiness: customer readiness is about whether the customer is in
a position to buy. This might include aspects such as whether they both need
and want the offer – so, this could include recognition of need, but also the
timing of the offer. Then there is the question about whether they have the
budget to make the purchase. Aside from the financial questions, there are
additional aspects of customer-readiness that relate to how willing this customer
is to deal with the supplier. Willingness to deal can, in turn, be affected by
customer corporate policies (e.g. multiple sourcing policies), their existing supply
arrangements (incumbent supplier advantage), and past history (previous
experience with supplier).
20
3.4 Fitting Together Desirability and Winnability
Figure 3 shows a conceptual framework of the expected value of a sales
opportunity to a supplier in terms of its desirability and winnability, illustrating
the way in which financial and risk factors might affect the desirability of a sales
opportunity.
As Figure 3 illustrates, the desirability of a sales opportunity is the sum of its
financial and relational value, which is affected by risk. When evaluating the
desirability of a sales opportunity, the sales team should consider that
desirability is positively impacted not just by financial value but also by relational
value, and is negatively impacted by risk. As the far left of Figure 3 shows, the
financial value of a sales opportunity might be measured in terms of revenues,
volumes, net present value etc; and the relational value might include
innovation, reputation, ability to sell on to other customers etc. The upper part
of Figure 3 shows that risk factors affecting desirability might include
implementation risk, reputational risk, and the risk that the supplier’s solution is
‘leaked’ to a competitor by a customer.
Figure 3: Conceptual Framework of Factors Affecting the Attractiveness
of a Sales Opportunity
The lower part of Figure 3 deals with the winnability of the sales opportunity and
shows that this is driven by the (perceived) strength of the supplier’s value
proposition and the readiness of the customer. The perceived strength of the
value proposition might be affected by its relative effectiveness but also by
21
factors such as the technological fit with the customer’s existing business, and
its ease of use. Customer readiness might include recognition that the customer
wants or needs the solution, and might also be affected by the customer’s own
sourcing policy and by its previous experience with that suppler.
In summary, this means that:
1. The winnability of a servitized sales opportunity increases
with the relative perceived strength of the vendor’s value
proposition
2. The winnability of a servitized sales opportunity increases
with customer readiness
22
4. Using Desirability and Winnability to Develop a Sales
Strategy
In this section, we discuss how sales leaders can apply the concepts of
desirability and winnability to their firm’s portfolio of sales opportunities, using
the technique to develop a sales strategy. By ‘sales strategy’ we mean here a
consistent and clear-sighted approach to a series of sales opportunities that
prioritizes sales opportunities in a way that will yield the optimal result for the
firm. A sales strategy will not treat all sales opportunities as equally valuable,
and it will not look purely at the top line revenues but will also take into account
the longer-term impact on the supplier’s bottom line.
Some business-to-business service providers already use a structured approach
to evaluating sales opportunities based on desirability and winnability. IBM, for
example, is now incorporating this thinking explicitly in its bid/no bid decisions
(conversations with author). GE and Oracle are starting to use this technique,
pushing marketing and sales to collaborate on evaluating sales opportunities. In
Oracle EMEA, for example, each country has a “Demand Generation Board”
where sales and marketing work together to agree on the most attractive
market segments, the value propositions for these segments and the lead
generation strategy. In these discussions, marketing characteristically takes the
lead on which segments Oracle most wants to pursue (desirability) and sales
leads on which customers are most likely to respond positively (winnability conversations with author). Given the costs and risks of servitization identified
earlier, companies moving towards servitization may need to consider a similar
approach.
Our definitions of desirability and particularly of winnability indicate that these
are dynamic concepts that are affected by the actions of the supplier in shaping
its market place. Figure 4 illustrates a portfolio management approach to sales
opportunities that can be used to increase sales effectiveness.
23
Figure 4: Sales Opportunity Portfolio
The portfolio of sales opportunities in Figure 4 maps the winnability of the
opportunity (X axis) against the desirability of the opportunity (Y axis). It
illustrates four different sales opportunities, which could be opportunities with
four different customers or even four different opportunities within the same
customer.
The most effective solution for a sales director faced with prioritizing scarce sales
resources to address multiple opportunities is to allocate resources
disproportionately towards those desirable opportunities that the company is
most likely to win (Opportunity 3), whilst ‘pulling the plug’ earlier on the unlikely
opportunities (Opportunity 1). The choices for Opportunities 1 and 3 are
therefore clear-cut.
However, the portfolio also illustrates two other situations. Opportunity 4
represents an opportunity that the company has a high chance of winning but
that has low desirability. In this area, it does not make sense to squander costly
field sales or account manager resources unless the desirability can be
improved; if not, the focus should be on reducing the cost of sales, perhaps by
moving these opportunities to cheaper channels online or via call centers.
Opportunity 2 (Invest) is an interesting and common situation in which the sales
opportunity is highly desirable but the company has a low chance of winning it.
Price discounting might increase the chances of winning but will reduce the
attractiveness of the opportunity. Altering the value proposition in some way
would definitely increase the chance of winning the business but might also
increase costs and hence tend to reduce the attractiveness of the opportunity.
The overall objective of using such a portfolio is to optimize sales effectiveness,
containing sales costs whilst increasing sales effectiveness. This is the first time
that this approach has been used with regard to individual sales opportunities.
However, it is known to work in marketing – previous research has shown that
24
improving the allocation of marketing resource is more effective than increasing
marketing budgets.
But, when we apply this kind of portfolio thinking to sales opportunity selection,
we have to add a third dimension, which is time. Sales opportunity selection
and portfolio management is not a static problem. Longer and more expensive
sales cycles, sometimes lasting for months or even years, mean that suppliers
must decide periodically whether or not to continue to pursue a sales
opportunity. As the sale develops, the desirability and the winnability of the
sales opportunity may change. We will return to this topic later – first, we need
to consider how the actions of the supplier can affect the sales opportunity
portfolio.
4.1 Improving the Desirability of a Sales Opportunity
Usually, it is possible for the supplier to improve the desirability of a sales
opportunity. One possibility is to reduce the cost of solution development. For
example, there may be a ‘learning effect’ from repeated sales, so that suppliers
start to offer ‘pre-developed’ solutions. Although this can be an effective
strategy for exploiting organizational learning and capabilities, it can reduce the
customer-focused and customized element and, if it is pursued too emphatically,
it may push the supplier back towards offering commodity products and away
from servitized selling.
In addition, as we have already seen, in a complex servitized sale, it is difficult
to realize advantages of scale because of the need for customization. Assuming
that customers desire customized solutions, reducing the solution development
input too much could reduce the winnability of the opportunity, especially if
there are competitors prepared to offer greater customization. The effect on
desirability would depend on whether the lower margins on non-customized
sales were offset by the lower investment costs in the selling and delivery
process.
Another sales strategy is either to postpone solution development or
alternatively to draw forward payment; in other words, to persuade the
customer to pay for costly customization. In some cases this might succeed, but
it is a difficult task for the sales person; it might increase desirability at the cost
of reducing winnability.
4.2 Increasing the Winnability of a Sales Opportunity
A classic discounting or other lower-price strategy may increase the winnability
of a particular opportunity, although it may reduce its desirability. The alternate
strategy is to improve the value proposition in some way (Figure 4). Improving
the value proposition is likely to result in increased costs for the supplier, or in
some value migration to the customer; either might reduce the desirability of
the opportunity. If different value propositions were plotted on the portfolio, the
one with the shallowest slope would be preferred, since this would be the one
that increased winnability the most for the smallest reduction in desirability.
25
This introduces a marketing/sales interface issue. Some practitioners believe
that developing solutions is the role of marketing; although other research has
found that some roles, such as customer relationship building, previously
associated with marketing have moved to sales. This is an important issue in
servitized selling since, in practice, sales and marketing departments are distinct
functional units.
26
5. Summary
In this paper, we argue that the trend towards servitization – supplier companies
having to increase the service element they provide to their business-tobusiness customers - has profound consequences for selling which have been, to
date, largely unrecognized. Often, servitizing means that the opportunities to
gain efficiencies through standardization are limited. For this reason, it is
important that companies have a process that deals systematically with the
costs and risks associated with servitization. This paper notes a number of
implications for the practice of business-to-business selling. We argue that
servitization leads to longer and more costly sales cycles which, in turn, impact
on sales effectiveness. There is a link between higher sales costs and the
difficulties that vendors experience in profiting from servitization.
The
consequences for the role, skills and capabilities of the sales person lie outside
the scope of this paper but would certainly be a topic of additional interest.
We have argued that companies should regard servitized selling as a risky
activity; certainly, as a riskier activity than selling standard services or products.
We therefore propose that suppliers should consider this kind of selling as
though it was an investment with, frankly, an uncertain. We have shown that
every sales opportunity, whether with an existing or with a new customer, can
be evaluated based on its desirability and winnability and we have set out a
conceptual framework to demonstrate the relationships between these
constructs.
In section 4 we demonstrated how the desirability and winnability approach can
be used to develop a sales opportunity portfolio to support sales strategy.
Portfolio management is concerned with notions of risk and return in resource
investment and asset management. So far, these concepts have not been
applied in sales. Whilst our sales opportunity portfolio concept is informed by
customer portfolio approaches used in marketing, our approach differs in
focusing on the specific sales opportunity as the unit of analysis, and in
proposing a risk-adjusted financial value as the key metric to position the
opportunity within the portfolio. Research is now needed to examine the impact
of a portfolio-driven approach on managerial decision-making in the sales
context.
We have also discussed the use of sales opportunity selection as a managerial
tool to ensure that the supplier organization does not over-extend itself. It
follows that, if a supplier is servitizing, it should frequently re-evaluate its sales
opportunities during the sales process, so that it can understand the expected
monetary value of each opportunity and, where necessary, pull out of less
attractive opportunities.
This has consequences for the relationship between marketing and sales. Often,
marketing and sales work in a linear fashion, with marketing identifying
opportunities and then handing them over to sales (Kotler et al., 2006). In the
servitized world, supplier companies need a process in which marketing and
sales work together and take a more systematic and iterative approach to their
sales opportunities. In practice, it is likely that sales directors will need to
27
develop new skills in the systematic evaluation of opportunities, and marketing
directors will need to be able to provide input about the relative strength of the
value proposition and the activity of competitors. This process should be
empowered to ‘pull the plug’ on sales opportunities whose expected value has
deteriorated below a set threshold level.
This raises a question about who is empowered to make decisions about
adjusting sales strategies, such as decisions to improve the value proposition or
change the pricing. In some organizations, for example where there is a
substantial design/customization component in the sale, technical or operations
people might be used to add value into the selling process. Where the bids are
very large indeed, the decision whether to bid and how to price may rest with
the main board.
5.1 Endnote
There are some limitations to our proposed approach. The first is that the
desirability of the sales opportunity and its winnability are not independent. If
the supplier increases its investment in a sales opportunity, it increases the
chance of winning it but can reduce the attractiveness of the eventual win.
Although, at a conceptual level, this reduces the power of the portfolio analogy,
at a practical level it has useful implications for managers. Thinking about the
impact that a change in offering might have on desirability as well as winnability
may help sales managers make decisions about whether and how to proceed
with a major complex sales bid.
A second limitation of our approach is that we have focused on the supplier side
and we have not distinguished between the selling of different kinds of services.
Recent buy-side research with business-to-business customers has found that
services that these customers perceive as high-risk need different sales inputs.
Where the supplier is providing what are known as ‘semi-manufactured
services’, the sale may require more input, since these services affect the further
outputs of the buying company and hence may be perceived as higher risk.
Incorporating the buyer’s view of risk would add a valuable element to our
understanding of servitized selling.
A third, largely unexplored, issue is the time and investment salespeople require
to determine whether an opportunity is winnable. Anecdotally, many Sales
Directors believe that the secret of success in complex servitized sales is the
ability to quickly assess opportunities and to “pull the plug” on those that are not
winnable. The dangers many suppliers face is that the exploratory work needed
to assess the viability of an opportunity is itself a major cost that diverts
resources that could be better used to pursue the winners. Many salespeople,
left to themselves, will cling to an opportunity fueled more by their optimism
than by their rational judgment. To date there is little or no research into better
models for making quicker “pull-the-plug” decisions.
28
6. References and Suggested Further Reading
Articles
Baines, T. S.; Lightfoot, H. W., and Kay, J.M. (2009), “Servitized manufacture: practical
challenges of delivering integrated products and services”, Proceedings of the Institution
of Mechanical Engineers: Part B: Journal of Engineering Manufacture, Vol. 223 No. 9, pp.
1207-1215.
Brax, S. (2005), “A manufacturer becoming service provider – challenges and a
paradox”, Managing Service Quality, Vol. 15 No. 2, pp. 142-155.
Davies, A., Brady, T., and Hobday, M. (2006), “Charting a Path Toward Integrated
Solutions”, Sloan Management Review, Vol. 47 No. 3, pp. 39–48.
Davies, I., Holt, S., and Ryals, L.J. (2010), “Relationship Management: a sales role, or a
state of mind? An investigation of functions and attitudes across a business-to-business
sales force”, Industrial Marketing Management, Vol. 39 No. 7, pp. 1049-1062.
Kotler, P., Rackham, N. and Krishnaswamy, S. (2006), “Ending the War Between Sales
and Marketing”, Harvard Business Review, Vol. 84 No. 7/8, pp. 68–78.
Neely, A. (2007), “The servitization of manufacturing: An analysis of global trends”,
paper presented at 14th European Operations Management Association Conference, 1720 June, Ankara, Turkey, available at:
http://www.ifm.eng.cam.ac.uk/ssme/references/Neely_ref_cambridgessme07.pdf.
Neely, A. (2009), “ Exploring the financial consequences of the Servitization of
manufacturing”, White paper, PSS Group, Cranfield School of Management, Cranfield, UK
and Institute of Manufacturing, University of Cambridge, UK.
Stanley, J.E. and Wojcik, P.J. (2005), “Better B2B Selling”, McKinsey Quarterly, Vol. 38
No. 3, p. 15.
Spring, M. and Araujo, L. (2009), “Service, services and products: rethinking operations
strategy”, International Journal of Operations and Production Management, Vol. 29 No.
5, pp. 444-467.
Storbacka, K., Ryals, L., Davies, I.A., and Nenonen, S. (2009), “The changing role of
sales: viewing sales as a strategic, cross-functional process”, European Journal of
Marketing, Vol. 43 No. 7/8, pp. 890-906.
Vandermerwe, S. and Rada, J. (1988), “Servitization of Business: Adding Value by
Adding Services”, European Management Journal, Vol. 6 No. 4, pp. 314-324.
Books
Ford, D., Gadde, L.E., Hakansson, H. and Snehota, I. (2003), Managing business
relationships, Wiley, Chichester.
Rackham, N. (1998), Spin Selling, McGraw-Hill, New York.
Rackham, N. and Ruff, R. (1991), The Management of Major Sales, Harper Business,
New York.
Rackham, N., Friedman, L., and Ruff, R. (1995), Getting Partnering Right: How Market
Leaders Are Creating Long-Term Competitive Advantage, McGraw-Hill, New York.
29
Slywotzky, A. J. (1996), Value migration: How to think several moves ahead of the
competition, Harvard Business School Press, Boston.
Websites
CIA (2010), World Factbook, accessible at https://www.cia.gov/library/publications/theworld-factbook/index.html accessed 22 July 2011.
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