Where The Action (And Money) Is

Nortel Networks Corp. has shed all of its major factories but one. In Brampton, Ont., the Canadian company that started life making telephone equipment converted an old manufacturing plant into its new corporate headquarters. Where workers once assembled switches that direct telephone traffic, executives are completing a transformation to turn the hardware manufacturer into a seller of services. "The decision we made was to become designers and implementers of solutions," explains Charles Childers, chief marketing officer. The changes affect just about everyone. With the factory closures came proclamations that mission-critical employees at Nortel were product designers and salespeople. Hardware sales decreased while the company focused on building telecommunications networks and assembling them for customers. Salespeople went from selling equipment to helping customers build fiber-optic networks that move Web data. They became corporate bloodhounds sniffing out customers for traces of new technology that could move markets. "They're a large source of information," confirms Childers. Nortel may be a dramatic example of a manufacturing corporation turning to services to boost revenues, but it is not the only one. Honeywell International Inc. has introduced Web sites to sell online information to factory chiefs and managers in aerospace and general operations. It has spent more than $100 million to roll out MyPlant.com and two other e-hubs, which it sees as a supplement to narrowing margins from product sales. Cisco Systems Inc.'s Internet Business Solutions Group offers to show customers the secrets the San Jose corporation has discovered to making money using the Web. The 4,200 North American franchisees of Snap-On Inc., Kenosha, Wis., sell tools to fix cars and other equipment and also offer financing and training seminars on using the latest tools. Victorinox AG, the Ibach, Switzerland-based manufacturer of Swiss Army knives, also makes bags for laptops, and with a purchase comes a year of theft insurance. Others make money by buying up distribution channels, selling replacement parts, or offering Web services that help customers resell old equipment. In doing so, they discover new revenue streams; the best ones are those that run counter to product sales cycles. The rise of Web research forced many manufacturers to bring out services. Now that customers can track down details about almost any product made anywhere, salespeople at traditional industrial companies find it difficult to differentiate their company's device made on Main Street, U.S.A., from their competitor's that is made more cheaply in China or Mexico. Mergers and acquisitions have pushed firms to consolidate the number of suppliers they use. Surviving suppliers offer something special, such as innovative service. At the heart of Nortel's changes were developments in the Internet, opinionated customers, and hard lessons learned a decade ago. In the early 1990s the corporation failed to heed market demands. Customers wanted central office switches that could be upgraded easily to benefit from new technology. Its leading rival, AT&T Corp., brought out switches that customers wanted, while Nortel made glitch-ridden ones that were tough to refine. Observers blamed outages in U.S. phone service on problems linked to Nortel switches. The company proved slow to address the problems, revenues declined, and Nortel's stock price halved. "They had lost touch with the market. They weren't listening to their main customers," explains Larry MacDonald, author of Nortel Networks (2000, John Wiley & Sons). The Canadian giant learned its lesson. Nortel began conducting satisfaction surveys and tied salaries of executives to results. It integrated the research and development arm -- formerly an ivory tower of sorts, separate from marketing and other divisions -- into the corporation. This put researchers in touch with what customers were saying. Those customers demanded speed in moving data across the Internet. Corporate customers wanted to be able to send records -- all the contents of an entire billing department in Boston to Bombay in a few minutes, for example. Nortel built a system to offer that kind of capability. Its fiber-optics network can send 1.6 trillion bits of data a second across the Web, compared with Lucent Technologies Inc., which can process just 2.5 billion bits per second. Nortel now handles 75% of Internet data traffic in North America. Speed lands customer contracts and so do the services offered by sales teams at Nortel. The company won a deal to build a network for Spain's Jazz Telecom SA because it assigned designers to the project three months before bidding began. "Lucent wanted commitments upfront before the designers went to work," explains MacDonald. Different Skill Set Prowess in selling services demands skills different from those used in a typical product pitch. Salespeople in manufacturing who succeed in selling services are those who reinvent themselves. Some find ways to use traditional products as a way to interest customers in more lucrative services. They know how to diagnose a customer problem, and how to quickly outline it for executives at corporate headquarters. This helps marshal support needed to address the difficulties or even to create a new service stemming from them. Smart salespeople have a nose for market leaders and cultivate customers who see emerging trends. IBM Corp. early on transformed hardware peddlers into sellers of services -- "trusted business advisors" in Big Blue lingo. In the IBM Microelectronics division, salespeople in the network-logic-marketing line, which number between 100 and 150, lure customers with intellectual property developed within IBM. "They are looking for the technical help that they used to find internally," explains Duncan Needler, manager of customer logic marketing. Translation: Salespeople include design services in the sale of semiconductors. Three years ago, the division opened its first design centers where customers could come to work with technologists to customize IBM semiconductors to their applications. Companies of all sizes, from start-ups to major corporations, use the services. The difference is that corporations tend to have research and development capabilities but need help figuring out how their technology should function with Big Blue's. When it comes to entrepreneurs, a company may own just a couple of good ideas. In that case, IBM designers become product developers for the start-up. Needler expects design services will become more important as corporations mimic the entrepreneurial model and sell off research operations. "The next trend is network equipment companies divesting research and development, and just coming to us with a specification," he predicts. IBM now runs 19 design centers worldwide. To sell its semiconductor and design packages, IBM likes to recruit salespeople from L.M. Ericsson Telephone Co., Lucent, Nortel, and other companies from which it hopes to win business. Armed with inside information that comes with being a former employee, salespeople can size up a prospect's technology and business model and then put together a proposal to convince IBM's customer logic unit to accept the company as a customer. This can involve price cuts on chips or changes to technology -- two issues conservative managers in large corporations generally avoid. "Salespeople have to be arbitrators especially in these complex relationships like joint development and intellectual property sharing. They really have to know what they're talking about," emphasizes Needler. Persistence is key to selling a product and service mix, be it a package involving computer chips or potato chips. "The quality that is becoming valuable is service motivation," explains Herbert M. Greenberg, founder of Princeton, N.J., sales consultancy Caliper, and coauthor of How to Hire and Develop Your Next Top Performer (2000, McGraw Hill). "Where the ego-driven person needs to hear 'yes' as a means of gaining gratification, the service-motivated person needs to hear 'thank you.'" Problem solvers It's not only salespeople at high-tech companies looking for the "thank you" in response to a well-performed service. Traditional manufacturers also are introducing services to help sell products and to boost revenues. Ecolab Inc., founded as a detergent manufacturer in 1923, runs an old-fashioned business. When James L. McCarty joined in 1963 he sold detergents and other cleaning supplies to restaurants in Atlantic City, and the company had revenues of $60 million. As Ecolab grew, McCarty worked his way up the company ladder through sales. By 1999 Ecolab boasted sales of $2 billion, and McCarty had become senior executive vice president supervising five divisions including 4,000 salespeople in the institutional division. "People don't sell things anymore," he asserts. "They solve customers' operational problems with products or services." Among the customers whose problems Ecolab is solving are 25,000 McDonald's Corp. restaurants worldwide. In Ecolab's hometown of St. Paul, the company runs Ecolab University, a sales training mecca. There it teaches salespeople about the technical aspects of its products, and ways to improve their listening skills. They need to be good listeners to understand complaints restaurateurs have about business, and to bring back ideas to the corporation for new services based on those gripes. One such idea generated by a customer and relayed back to the corporation by a salesperson involved insects. Customers complained that they couldn't get rid of them fast enough. Thus was born Ecolab's pest-elimination service. Now one of the world's largest killers of cockroaches, Ecolab's pest division employs some 1,600 people. Services, including repairs, now account for more than 10% of Ecolab's annual revenues, up from less than 1% in 1985. Breaking into services is also top priority at International Paper Co., Purchase, N.Y. The shift is taking power from manufacturing managers and putting it into the hands of marketing and sales managers. The annual planning process now starts with a marketing plan, which is translated into a sales plan. It filters down to the factory floor where managers are asked to support it. "It used to be, here's the 2001 production schedule, divide it up by region and figure out how you're going to sell it," explains Bill Waters, global project manager for sales-force effectiveness. The corporation is reassessing the entire sales process: from the number of salespeople it employs, to what qualities it seeks in recruits, to how they are trained and compensated. When it used to hire salespeople, which number between 3,000 and 4,000 in the U.S. alone, International Paper sought individuals who knew the paper industry. Now the goal is to hire based on certain behaviors and traits -- entrepreneurial and "positively aggressive," explains Waters. New recruits can be taught the paper industry. What's more, the company is putting veteran salespeople through training designed to turn them into business consultants, including courses such as financial management for nonfinancial managers. The company has designed processes to turn salespeople into problem solvers; the Market Optimization Program, for instance, shows them what questions to ask customers about different parts of the supply chain to bring to bear product development or cost-cutting services. International Paper has learned that reinventing sales also involves reeducating the customer. "They tell us they want a supplier that gets them product on time with a minimum amount of hassle," explains Waters. "They don't say, 'I want a supplier who is going to make my business stronger.'"