MASTER THESIS RESEARCH PROPOSAL

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MASTER THESIS

RESEARCH PROPOSAL

Solving the services challenge.

An exploratory study to develop a value proposition for

Philips Healthcare’s Managed Equipment Service.

Author: Josien Overakker Student number: 1400770 Telephone number: 0614348281 E-mail: josienoverakker@hotmail.com

Date: June 26 2009

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Solving the services challenge

Abstract

This study develops a distinctive value proposition for Managed Equipment Service (MES), a

relatively new service offering at Philips Healthcare, in order to successfully make the transition from a product-oriented company to a provider of MES. The components of a business model are examined with the help of different business model frameworks. Outcomes confirm that the value proposition needs to be developed further. A relationship is established between the different Hospital segments and the service components of MES to show that MES can facilitate Hospitals to deliver the strategies they aim for. Furthermore, the key drivers of value creation are identified by analyzing MES related documents and interviewing MES experts. It is argued that the value drivers encompass the financial and non-financial benefits and the value of the risk transferred. An integral appraisal model is developed that makes it possible to do a cost / benefit analysis of Managed Equipment Services, the Public Sector Comparator and the Do-Minimum-Option. The tools developed are applied to a specific case to compare the risk-adjusted cost per benefit point under each alternative and to create an

understanding of how the tools are used in practice. Furthermore, requirements for the organization of Philips Healthcare are formulated with regard to the factors structure, systems and skills. These requirements assist in successfully extending the concept of MES into broader markets.

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Preface

This report is the final assignment of my Master Corporate Financial Management and with that part of my graduation of my study Business Administration at the University of Groningen. I have always wanted to finalize my master studies at a Dutch company in order to apply theoretical knowledge in practice. Philips offered me the opportunity to fulfil this desire by means of an internship at Philips Healthcare in Eindhoven. I was pleased to conduct and write this report on ‘Managed Equipment Service (MES) and its customer value proposition’ on their behalf.

The internship in itself comprised eight months. A potential client in the Middle East region was the main ‘trigger’ to come up with a thorough, reliable and valid customer value proposition. The first months were very instructive and explorative and gave me the chance to get informed on the topic. An analysis of MES and its constituent parts was the main purpose of these months. A trip to the UK to meet a MES expert was part of this exercise. Thereafter, I started to focus more on the relation between the services and the strategic intent of Hospitals and the appraisal of MES. This part was challenging since it required significant in-depth knowledge and customer-specific insights. After approximately four and a half months, I started working on the thesis of which you have now the finalized version in front of you. At times, this was quite challenging because I wanted to contribute both to Philips’ performance and to the academic literature. However, I think that both parties will agree that both these objectives are fulfilled.

I would like to thank everyone who has invested their time and energy in me and in the MES project. I was surprised to find that all Philips’ employees were open and willing to help me out when I was in need of information of any kind. All of these contributions were valuable to this final report. Several people that were directly involved in my project I would like to thank in particular. First, I would like to thank Stan Sweep, my supervisor at Philips Healthcare and Senior Director of Finance of PHS EMEA, for his support. By sharing his experiences during our weekly meetings, critically reviewing my deliverables and constantly challenging and encouraging me, he assisted me to learn and to benefit optimally from my internship. Furthermore, I would like to thank the rest of his team for their

enthusiasm (special thanks got to Milo Schoonheijm, Murk Westerterp, Ritesh Sharma and Mark van Meggelen).

Furthermore, I would like to thank Dr. W. Westerman, my supervisor from the University of Groningen for his useful insights and guidance during the course of this project. He was very open-minded with respect to my thesis topic and was of great help in structuring the report and reviewing my proposals and initial drafts. His comprehensible and prompt feedback helped me to finish this thesis within five months. In addition, I would like to thank Dr. J.H. von Eije for his assistance as my second supervisor. Last but not least I owe thanks to my family, my boyfriend and my friends for their endless support during my entire study and in particular during this final challenging project.

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Management Summary

This report is the result of a study that has been conducted at Philips Healthcare in Eindhoven. Philips Healthcare wants to make the transition from a product-oriented company to a successful provider of Managed Equipment Service (MES), a relatively new service offering. It concerns a long-term strategic partnership between Philips and a Hospital where all the medical equipment is provided at a fixed fee per month. However, PHS, an integral part of Philips Healthcare, realizes that a distinctive value proposition for MES has not been thoroughly developed. In order to solve this challenge the following objective has been formulated: ‘Develop a distinctive value proposition for Managed

Equipment Services as offered by Philips Healthcare in order to become a successful provider of MES’.

Three sub-questions are formulated to structure the study as a whole. First, an analysis is made of the components of the MES business model to determine what elements need to be further developed. This is done with the help of the Bell-Mason diagnostic and a framework for business models. The outcomes confirm that the value proposition for MES needs to be further developed.

Thereafter, this value proposition is developed by identifying and modelling the key drivers of value creation for the client. First, a relationship is established between the different Hospital segments and the main services and benefits of MES in order to show that MES can facilitate Hospitals to achieve their strategic objectives. Furthermore, the key drivers of value creation are determined by analyzing MES related documents and interviewing MES experts. It is found that the financial and non-financial benefits and the value of the risks transferred from the Hospital to Philips are essential in determining the value of MES. An integral appraisal model is developed in order to value these drivers of value creation of MES, the Public Sector Comparator and the Do-Minimum-Option.

The third part of the study applies the tools developed on a partnership that was closed with ‘The Royal Hospitals’ in October 2005. An understanding is created of how the tools developed are used in practice. The risk adjusted net present cost per benefit point is assessed for each alternative and it is found that the benefits of MES outweigh the higher costs of implementing MES since it offers the highest value for money.

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Introduction

‘Any industrial manufacturer that has not awakened to the fact that it must become a service business is in serious peril (Allmendinger 2005, p.131).

This quotation coming from the Harvard Business Review stresses the importance of services for product companies. Philips is one of these companies that starts to realize the potential and value of services for their clients.

1.1 Introduction

This chapter gives an overview of the study, conducted at Philips Healthcare, by clarifying the challenge and the research process through which this question is resolved. Some background

information is presented on the owner of the challenge to get a clear picture of the context of the study. Therefore, this chapter starts with a brief description of Royal Philips Electronics, narrowing down to Philips Healthcare, Professional Healthcare Solutions and Managed Equipment Service in particular. In addition, a description of the (relevant) trends and developments in the health care market are presented. The characteristics of providing services and its accompanying challenges are also dealt with here. The motivation for this study logically follows from these accounts. Thereafter, the problem statement including the research objective, the central research question, the related sub-questions, the research conditions and the conceptual model are presented. Subsequently, the research process describes the research steps and their correspondence to the sub-questions and the methodology used. Finally, a preliminary planning of the study is presented.

1.2 Company profile

1.2.1 Royal Philips Electronics

Royal Philips N.V. (hereafter Philips) was founded in 1891 in Eindhoven by Frederik and Gerard Philips. The company started with the production of light bulbs. Nowadays, Philips is one of the world’s largest electronics producers and one of the top 50 global brands (Interbrand, 2008). Sales in 2008 totalled 26 billion Euros, resulting in earnings before interest and tax (EBIT) of nearly 2 billion Euros. After several reorganizations, sales and acquisitions performed over the last couple of years, Philips has been organized in three market-oriented segments: Healthcare, Consumer Lifestyle and Lighting. Philips employs over 121.000 people and the 60.000 registered patents illustrate the innovative character of the company for which it is known all over the world. Philips’ mission is to: ‘Improve the quality of people’s lives through the timely introduction of meaningful innovations.’ From this mission the following vision was formulated: ‘In a world where complexity increasingly

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This mission and vision are well translated into the following sentence as declared by Gerard

Kleisterlee, President and CEO of Philips: With this vision, we are putting people right at the centre of

things, with Health and Well-being as our overarching theme.

Vision 2010 focuses on building Philips towards a market-driven, people-centric company with a strategy and structure that fully reflect the needs of its customer base, leading to an increasing

shareholder value. The challenges this vision brings with it for Philips Healthcare are described in the next sections.

1.2.2 Philips Healthcare

Philips Healthcare activities started in 1918, when it first introduced a medical X-ray tube. Today, the business is active in more than 63 countries, employing approximately 32.500 employees and it is a global leader in diagnostic imaging systems, ultrasound and patient monitoring, cardiac devices and healthcare information technology services. In 2007, the Healthcare business accounted for 24% of Philips overall sales, making Healthcare Philips’ second largest contributor to sales of the product divisions. With Health and Well-being as Philips’ overarching theme, the division’s growth expectations are great and this creates a challenge to take this growth potential to the max.

1.2.3 Professional Healthcare Solutions

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Solving the services challenge 1.3 Developments in the healthcare market: from products to services

Due to globalization pressure, higher market complexity and the increased competition resulting from this, traditional product-manufacturing companies saw their margins drop. As a result, they are continuously extending their service business where higher margins can be earned (Gebauer, 2008). They change their position along the product-services continuum because the increasing competitive intensity and corresponding erosion of product margins make it difficult to achieve product

differentiation. Products evolve into commodities and, as a result, services become more and more important. These services are required to improve product performance, to enhance operational skills and to give support (Andersen et al, 2003). However, many manufacturing companies encountered severe problems when trying to benefit from this promising new market. In a discussion with 60 service providers, some analysts found that only one out of four companies saw substantial gain (Johansson et al, 2003). The trend in the demand for services shows an overall growth but the sector also becomes more competitive. Many product companies are still unsure about important strategic questions they should have resolved before entering the market. This confusion with respect to the strategic intent and the source of competitive advantage (Johansson et al, 2003) both within the organization and in the way it is translated into the value proposition to the customers, leads to disappointing results for many organizations who have entered the service market. Product companies should thus strive for strategic clarity in order to build a successful value proposition.

The healthcare industry is one of the sectors in which this development can be seen. The increased complexity of the products and processes and the growing need for support services result in an increased interdependence between the service provider and the client, the Hospital (Panesar and Markeset, 2008). The rapid development in technology combined with the increased competition force the service provider to continuously innovate its value proposition. Manufacturers in the healthcare industry continuously try to renew their products but their clients focus more on service components and on the development of a strategic partnership with the service provider. Therefore, companies like Philips are introducing outsourcing of services and other partner sharing models. However, the production and delivery of services and their characteristics differ from those from manufacturing (Karmarkar and Pitbladdo, 1995). Manufactured goods are tangible and portable and a clear distinction can be made between production and use. Services on the other hand, are customized change activities adding value to the recipient (Philips Lighting Beyond Lighting, 2006).

Inventories are not possible and service outputs involve a lack of tangibility and portability, more customer contact, joint production and customer-specific inputs (Karmarkar and Pitbladdo, 1995). These characteristics have an enormous impact on the nature of service market competition, pricing and contracting, which has strong implications for the service business model.

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efficiency and effectiveness of the operations, maintenance and support processes, the service provider should operate as the sole integrator of the product and service offering towards the client. Thus, outsourcing, building partnership relations and customer support services are becoming more and more important for healthcare providers (Pai and Basu, 2007). Customer support providers invest in a strong product and service differentiation, while the goal of outsourcing is that strategic partners assume the operating risk and responsibility for the customer’s processes (Gebauer, 2008).

Increased labour productivity, reduced costs and less downtime, and the focus of using the in-house personnel on core activities are some of the typical advantages that can be realized by outsourcing and customer support services. Managed Equipment Service offers the potential to combine the benefits of these two service categories.

Overall, the developments in the healthcare market can be described by high competitive intensity, erosion of product margins, increasing demand for services and a growing need for strategic partnerships. These trends indicate that product companies should focus on providing services that create value for the customer (Van Riel and Lievens, 2004). Some literature exists on new service development processes in consumer and industrial services, e.g. when a manufacturer changes its role to become a service provider. However, literature is very modest and gives no solid support to product companies on how to successfully make the transition from a product-oriented to a provider of

services and how to develop a distinctive business model.

1.4 Motivation for the study

The previous section showed that the healthcare market is changing. The market for service providers is growing and more and more clients, Hospitals, outsource many of their non-core service offerings. However, product companies in this market struggle to successfully develop their business model. Over the last couple of years several manufacturing companies have been trying to successfully deliver on the healthcare service needs of Hospitals, e.g. Philips, Siemens and GE. Especially in the United Kingdom, one of these services, Managed Equipment Service, is a relatively well-known concept. Philips Healthcare has also closed some deals as a provider of MES, but to a far lesser extent than its direct competitors have.

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Solving the services challenge 1.5 Problem statement

In this section, the problem statement is defined. A problem statement points out what you want to know and why. According to de Leeuw (2002), the problem statement consists of three elements: the research objective, the research question and the research conditions. The research question is subdivided into three related sub-questions, which are presented below.

1.5.1 Research objective

According to de Leeuw (2002) the research objective defines for whom the research is done, what the outcomes are and why it is important for them. Central to the research objective is the ‘why’ question. Managed Equipment Services is a relatively new service offering at Philips Healthcare. Over the next couple of years, Philips wants to become a successful provider of MES in the EMEA region.

However, as indicated by the management of Philips, no distinctive proposition has been developed as to why the customer should buy the service. Therefore, the objective for this study is formulated as follows:

‘Develop a distinctive value proposition for Managed Equipment Services as offered by Philips Healthcare in order to become a successful provider of MES.’

This proposition should give Philips the tools to convince (potential) clients that the service adds more value or better solves a challenge than the proposed alternatives.

1.5.2 Research question

De Leeuw (2002) states that the research question follows the research objective. It is the most important starting point for translating it into related sub-questions. Central to the research question is the ‘what’ question. Managed Equipment Service potentially delivers financial benefits, improved operational efficiencies and increased standards of healthcare. Furthermore, it enables the client to focus more on their core business of providing high quality healthcare to their patients. However, there is no clear statement developed at Philips that describes what is offered to the customer and a

distinctive value proposition has not yet been developed.

This study investigates different aspects that play a part in developing a value proposition for a product-oriented company that wants to become a successful provider services. The research question for this study is formulated as follows:

‘How can Philips Healthcare successfully make the transition from a product-oriented company to a provider of Managed Equipment Services by developing a distinctive value proposition?’

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Professional Healthcare Solutions and Global Sales and Service International (GSSI) and is of high practical relevance. It points towards an incomplete value proposition for Managed Equipment Service. Before a design of a distinctive value proposition can be made, an analysis is done of the whole business model as it has been developed for MES. Systematically identifying all of its

constituent parts helps to understand what needs to be examined further. This prevents for aiming the study in too early a stadium and ensures that the gap in the value proposition is thoroughly exposed. In order to investigate the challenge more specifically, the research question is divided into several related sub-questions. These sub-questions are constructed in line with the DOV-methodology and they help to answer the research question.

1. What does the business model of Managed Equipment Service currently used by Philips incorporate and what element(s) should be further developed?

In order to come to an answer to this question two diagnostic models are used to describe and analyze the MES business model as it has been constructed so far: the Bell-Mason diagnostic (Bell, 2003) and a framework for business models as developed by Johnson et al (2008).

According to these researchers, a business model consists of four interlocking elements: Customer Value Proposition, Profit formula, Key resources and Key processes.

The challenge as presented by Philips points to an inadequately developed customer value proposition for MES. However, to identify what is already present at Philips Healthcare, the Bell-Mason diagnostic and the framework for business models are used. These help to identify what element(s) need to be further developed during the course of this study in order to come to a properly designed and developed business model for MES.

2. What are the key drivers of value creation for the client and how can they be modelled and

assessed to value Managed Equipment Service and its alternatives?

An assessment is made of what (valuation) methods and analyses are used at Philips Healthcare and by different competitors. This incorporates:

-An identification of the Hospital’s strategies and objectives

-Services that can be offered and delivered to the client within the MES contract. -An identification of the MES’ services and their accompanying benefits

-Linking the services offered within the MES contract with the client’s strategy and tactics. -An identification of the non-financial benefits

-An identification of the risks transferred (in terms of impact and probability) under the different alternatives.

-A valuation of the different alternatives incorporating all of the above.

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3. How can the designed value proposition for Managed Equipment Services be applied at Philips

Healthcare (application of the models on a specific case) and what can be learned from it?

To benefit from the analysis and design of a new MES value proposition, several changes need to be implemented. The implementation of this change is left to Philips Healthcare. However, several requirements can be identified for the organization of Philips that should assist in successfully implementing the newly designed value proposition. In order to come to the key requirements, the valuation methods are first applied to a specific case. Based on this case discussion, requirements are proposed that can assist Philips in becoming a successful provider of services.

1.5.3 Research conditions

The research conditions give constraints with regard to the study and the methodology used. They can be divided into process conditions and product conditions.

Process conditions

-The study is based on an internship at Philips Healthcare and has to be accomplished within a period of eight months;

-A substantial amount of the study has to be conducted individually. Product conditions

-The end product should meet the scientific requirements as formulated at the Faculty of Economics and Business and must provide a methodologically sound approach;

-The end product must be of practical relevance for Philips Healthcare and must be compliant with their requirements.

1.6 Research design

This study presents guidelines to Philips Healthcare on developing a value proposition for one specific service that is offered by several healthcare equipment manufacturers: Managed Equipment Service. The different steps in the research process that are followed in order to deliver on this objective and their correspondence to the sub-questions are described below. A framework, or conceptual model, that specifies the relationships among the study’s variables is presented. A conceptual model

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Solving the services challenge Figure 1: Conceptual model.

Business model Philips’ service offerings MES Key drivers of value creation

1.6.1 Explanation of the conceptual model

Philips Healthcare’s objectives

Step one of the research process takes the objective as formulated at Philips Healthcare as a starting point. The objective is to come up with a distinctive value proposition for MES.

Philips’ business model MES

An overview is given of the components of the MES business model as they have been developed at Philips Healthcare. At first, the Bell-Mason diagnostic is used to assess the challenges the venture is

Customer Value Proposition Key processes Key resources Profit formula Philips Healthcare’s objectives Diagnosis Services Risk analysis Hospitals’ strategies and tactics (Non-) financial benefits Cost/benefit analysis Value Proposition MES

Design (Analysis of)

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facing. Next, the business model is described in accordance with a distinction as made by Johnson et al (2008). In their point of view, a business model consists of four interlocking elements that, taken together, create and deliver value: a customer value proposition, profit formula, key resources and key processes. They argue that the most important to get right, by far, is the customer value proposition. The distinction into these four elements helps to identify the elements that need further refinement. The following sub-question is answered in this phase: ‘What does the business model of Managed

Equipment Service currently used by Philips incorporate and what element(s) should be further developed?’

Value proposition MES

During the second phase of the study, a distinct value proposition needs to be developed. Philips’ service offerings

A thorough assessment is made of all the services that can be included in a Managed Equipment Service contract as offered by Philips Healthcare. Furthermore, the strategies and tactics as they are pursued by different clients, the Hospitals, are examined. This helps to assess what the Hospital wants and how they want to achieve it. The generated information is categorized and the services and the accompanying (non-)financial benefits they offer are linked to the strategies and tactics as pursued by clients with differing needs. This helps to assess how the services deliver on the fulfilment of the different client’s strategy and tactics.

Key drivers of value creation

The next step is to develop a tool to value the key value drivers of MES and its alternatives by identifying the different value drivers and their value for the client. In order to perform an economic appraisal of MES, the value drivers are generally compared with those offered by two alternatives: the Do-Minimum-Option (DMO) and the Public Sector Comparator (PSC). The DMO represents an estimation of the costs, risks transferred and benefits of the status quo and the PSC entails an economic appraisal from implementing the MES in-house, using internal resources, to a level that is specified in the MES contract with the private sector partner.

The key value drivers that are assessed incorporate the value of the (non-)financial benefits and of the transferred risks. The financial assessment is used as a starting point. Thereafter, a weighting and scoring tool, to perform by Hospitals themselves, is developed to quantify the (qualitative) non-financial benefits in order to come to a certain benefit score for the three different alternatives. In this way a value can be put on the non-financial benefits described.

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Cost/benefit analysis

The identified key value drivers are used to come up with a comparison of the costs and the benefits of adopting MES or one of its alternatives. Several models need to be designed to come to a valuation of the different value-drivers and how they can be integrated in order to value MES and its alternatives. MES may be more expensive than the traditional management of equipment, but the value of the risk transfer and (non-)financial benefits may exceed the additional costs.

The development of these tools is an important step to come to a distinct value proposition as the value of the non-financial benefits and of the transferred risks helps to make a valid comparison between performing the service with and without a MES contract. Adjustments are made to the model as it has been used by Philips’ competitors to come to an useful tool for appraising the different alternatives. All the gathered information is combined to come to a model for appraising alternative ways of meeting Hospitals’ strategic objectives. This model shows how to evaluate the costs, the non-financial benefits and risks of the three different alternatives. This makes it possible to rank the three

alternatives and it helps to make a link between the wants and needs of the Hospital and the potential of Philips as a MES-supplier to deliver on these needs. The following sub-question is answered in this phase: ‘What are the key drivers of value creation for the client and how can they be modelled and

assessed to value Managed Equipment Service and its alternatives?

Philips Healthcare’s value proposition MES

The third phase of the research process uses the findings of the previous stages to improve the MES value proposition for Philips Healthcare. Changes need to be implemented in order to benefit maximally from the newly designed models. The implementation of these changes is left to Philips Healthcare but bottlenecks are identified that will help to successfully deliver the newly developed value proposition. The models developed are applied to a specific case and the outcomes are analyzed. The following sub-question is answered: ‘How can the designed value proposition for Managed

Equipment Services be applied at Philips Healthcare (application of the models on a specific case) and what can be learned from it?’

The sub-questions are used to further define the research process and the general research question. Thus, after these questions have been answered, an answer can be given to the research question and it becomes apparent ‘How Philips Healthcare can successfully make the transition from a

product-oriented company to a provider of Managed Equipment Services by developing a distinctive value proposition.

1.6.2 Evaluation

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Solving the services challenge 1.7 Data requirements and data availability

To be able to answer the research question and the related sub-questions, several data sources are consulted. The data gathered is mainly qualitative since the study has the character of an exploratory case study that helps to get a more in-depth examination of the situation and the issues at hand. The three basic ways to gather data are desk research, observation and interview.

1.7.1 Data gathering process phase 1

The study starts with a desk research of the secondary literature related to the subject. Insights from studies conducted in the past are used to get a profound idea of the challenge identified. Furthermore, extensive use is made of documents developed at Philips. The accumulated data is reduced to a manageable size by summarizing the data.

The second phase of the data gathering is carried out in the ‘field’. The field can be described here as Philips Healthcare’s department, with the focus on the division Professional Healthcare Solutions and Global Sales and Service International, which are both located in Eindhoven. Especially the input of the managers of PHS and GSSI is of great value to this study. According to Malhotra (2002), a depth-interview is an unstructured and direct depth-interview in which questions are asked to a single respondent to uncover underlying motivations, beliefs, attitudes and recommendations. Relevant stakeholders are approached for in-depth interviews, including the financial manager of PHS, the business developer of GSSI, expert consultants in the United Kingdom and several others. These formal and informal approaches in combination with focus group meetings help to identify the challenge that needs to be resolved. As soon as the challenge is agreed on, several business model frameworks are examined. Two of the frameworks that fit the situation are selected to serve as a guideline in evaluating and describing the MES business model.

During the second phase of the study, factors that should be considered to develop a distinct value proposition are examined. Several steps are taken to gather all the relevant information.

In order to truly understand the customer, the strategies and tactics as they are pursued by different Hospitals are examined. A study is done of a selected group of Hospitals around the world. Their annual reports and Hospital websites help to get a feel of the strategic intent of Hospitals and issues that Hospitals would like to see resolved (with the help of MES). Based on the information that is gathered, a categorization of the strategic objectives is made according to this impression of the importance and relevance of the numerous objectives. These findings are discussed and validated with internal experts from Philips.

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experts. Moreover, with the help of an external consultant and MES expert in the United Kingdom, this categorization is adjusted and worked-out in more detail to refine the extensive list. With the help of his expertise it is possible to make an estimation of the relevance of the specific (sub-) service as offered within MES and while keeping this in mind several items are added to or deleted from the list. This is followed by a confrontation and validation of the insights found with internal experts and key stakeholders (focus group). MES has a very broad service offering and with the help of these internal experts with practical experience the categorization is drawn up and validated. The extensive MES categorization can be found in Appendix III but for the purpose of this study a simplified and abbreviated version of the categorization is used.

Afterwards, these MES offerings and the Hospitals strategies are logically combined into one model. Together with an internal expert of Philips, who has a good feel for the MES offering and the strategic intent of Hospitals, decisions have been made with respect to what services deliver on which

strategies. By linking the services with the strategic objectives, an understanding is created of how MES can assist Hospitals to deliver the strategies they aim for. The list is sufficient to implement in real life but to optimize the model it should be validated with the help of more relevant key

stakeholders.

The next step is to identify and value the key value drivers of MES and its alternatives. The non-financial benefits are identified with the help of data of competitors and by assessing clients’ websites and annual reports. Furthermore, secondary literature is studied to get an impression of the (value of the) transferred risks. In the United Kingdom an extensive risk list is used, however, this list is not customized to MES and its service offerings. A risk list incorporating all the relevant risk components for MES is made with the help of the consultant. Finally, desk research is conducted to see what methods are used in the healthcare market to value MES and / or comparable services.

The third step of the research process examines the implementation of the MES value proposition at Philips Healthcare. The models developed are applied to a specific case and the outcomes are

analyzed. Information with regard to the case is gathered and assessed with the help of an experienced external consultant and internally validated with Philips’ experts.

Furthermore, requirements are formulated to assist Philips in implementing the MES proposition successfully in the market since changes are needed to benefit maximally from the newly designed models.

1.8 Methodology

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Solving the services challenge Table 1: Overview of methodology.

Research Topic Research method Research framework

1. Introduction Desk research, observation • DOV-model

2. Business model Desk research, interviews • Bell-Mason diagnostic

• Business model framework 3. Value proposition Desk research, interviews • Benchmarking

• Financial valuation methods 4. Application Desk research • Case study

• 7-S framework 1.9 Planning

To give a general indication, the study is conducted within the following time schedule: • October 1st 2008 – February 15th 2009 Internship at Philips Healthcare • February – March 2nd: Research proposal (introduction) • March 3rd – March 23rd: Chapter 2 (sub-question 1) • March 24th - April 24th: Chapter 3 (sub-question 2) • April 14th - May 19th: Chapter 4 (sub-question 3) • May 20th – June 26th: Appendices, conclusions and

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2. Diagnosis of the MES business model

Philips Healthcare wants to make the transition from a product-oriented company to a successful provider of services. However, the challenge as presented by Philips points to an inadequately developed customer value proposition for MES. In this chapter a diagnosis is made of the MES business model, as it has been developed so far at Philips Healthcare, in order to capture the challenges that need to be resolved. The Philips’ MES business model is described by two

frameworks: the Bell-Mason diagnostic (Bell, 2003) and a tool developed by Johnson et al (2008) that makes a distinction between four different components of a business model. These frameworks help to describe, analyze and explain the MES business model as it has been constructed at Philips Healthcare so far. Afterwards, the elements that need further refinement to successfully devise and deliver MES to its customers can be identified.

2.2 Bell-Mason diagnostic 2.2.1 Development stage of MES

Managed equipment service is a relatively new service offering and it is considered a new venture at Philips Healthcare. It is perceived as a new service category by the customer (Hospitals) and as disruptive by the market. The market is emerging, the consumer is exploring the new opportunities and therefore it is not only about the product / service development but all about market development. The characteristics of the new service offering require new capabilities that the current organization cannot provide (yet). Philips Healthcare needs to define, develop and test new strategies, structures, capabilities and relations. Important to note is that the new offering is not developed and intended to be a feature / enabler to sell more equipment but it is a business on its own.

In order to get a clear picture of MES and its development stage, the Bell-Mason diagnostic is used to assess in which phase MES is and whether it is in reasonable good health. The Bell-Mason diagnostic is a business creation framework and a quantitative evaluation method that assesses the health of an organization or of a new venture at four critical stages of organizational development: Concept, Seed, Product / service development (alpha) and Market development (beta) (Bell, 2003). For the

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what phase of the development MES is. Some are not fully aware of the essential requirements and are already acting as if the venture is in the Alpha phase (product / service development) though the venture is currently still in the ‘seed’ phase (see figure 2 below).

Figure 2: Development stage MES.

During the last few years the team has identified and addressed an increasing demand for services and MES in the market. The value of this market has been recognized and one is aware of the potential for Philips Healthcare to become a successful player in this relatively new service category. However, several dimensions are not fully addressed yet. This is explained more in-depth in the next section.

2.2.2 Bell-Mason diagnostic: MES

While the venture goes through the different phases, the diagnostic allows to measure and graphically plot an organization’s performance (in this case the performance of the new venture) in 12 relatively independent dimensions of organizational activity. These include the following: venture platform, product/service, delivery, business plan, marketing, sales, management, team, venture board, cash, financing and control (as formulated by Philips Bell-Mason diagnostic, 2008). All the dimensions are evaluated and compared with the rules of good practice as formulated after examining over 600 companies. The results for each step can be plotted on a 12-dimensional chart, which can be found below. During some stages of the development, different dimensions can be disproportionately significant and growth can occur in different rates. However, in the end of the development it should be well rounded.

2. Seed

3. Alpha

4. Beta

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Solving the services challenge Figure 3: Bell-Mason profile of MES.

The worked out diagnostic above (figure 3) has been drawn up by, among others, the Senior Director of Business Development at Philips Healthcare. She clearly recognizes that a gap exists between the ideal state of the ‘seed’ phase and the actual situation. When reading the diagnostic, it can be found that especially the dimensions marketing, sales, product/service, delivery and the venture board seem to be behind in their development. Below, the findings per quadrant are described more in-depth.

Product / service

The defensible and sustainable uniqueness of the offering is not yet clearly formulated, not at Philips Healthcare and not externally. Due to internal considerations, some services are currently considered out of the scope but seem to be important to the customer.

Market

The venture characteristics are related to a business model and a market that is less technology driven than Philips Healthcare is used to. This brings with it significant challenges. Service requirements per potential market segment have not been identified and the required skills and competencies are

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missing to successfully sell and deliver the new service offering. Moreover, market segmentation is not specifically formulated and the sequence in which the different market segments should be addressed over time is not yet determined. The positioning and pricing strategy of the service offering versus the products are still to be decided on. Furthermore, the value proposition needs to be clearly articulated and then validated by both internal and external stakeholders. Moreover, there are sources of conflict of interest between the new venture in relation to the business unit that have not been dealt with.

People

A core team is in place and dedicated and experienced project management teams are in place to manage the projects. In addition, some partner analyses have been made. However, the team is lacking start-up experience since their background can be mainly found in managing established businesses. In addition, an inadequate board structure and corresponding inadequate corporate governance model are in place since no advisory board is formed and there are no active outside advisors to complete the team.

Finance

For the next period, cash is sufficient to develop the new service offering. However, the impact and risks of the potential sources of conflict of interest (selling products versus selling services) are not yet defined, assessed and quantified. In addition, the performance metrics in place are not designed to drive the development of the new venture.

The diagnosis of the MES business model implies that a different organizational set-up and new capabilities are required. This has important implications for the established way of working. A new business model is proposed but it should be developed in-depth and covering all the dimensions in order to successfully deliver the new line of offerings to the customer. A description of the whole service offering and its deliverables should be drawn up in order to understand what does fall within the scope of the service and what does not. An indication should be made of what elements of MES are delivered by the venture and what parts are provided in cooperation with partners.

The sales strategy should be outlined before starting to generate leads, which is not how it has been done so far because of the internal disagreement with regard to the development phase of the business model of MES. The team should be strengthened with new capabilities to deliver this new business model. Furthermore, a value proposition should be developed and validated by interviewing

representatives of the key players. A segmentation and market roadmap can assist in identifying and sequencing the market segments to be addressed over time. This helps to determine how to position MES both externally and internally.

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the service offering. The Bell-Mason diagnostic also uncovers several other issues that can be refined. Nonetheless, for the purpose of this study it is most important that the main challenge is again found in the diagnosis above. An update of the business model is needed to benefit maximally from the

emerging service market Philips wants to address with its MES offering. The following section gives a description of the components of a business model and they are filled in for MES to identify what specific elements need to be refined and updated.

2.3 MES business model analysis

The term ‘business model’ is widely used and the construction of a sound business model is believed to determine the success of a (new) venture (Alt and Zimmermann, 2001). According to Magretta (2002) a thorough formulated and good business model is essential for every organization to be viable. However, there are multiple indications that the term business model is often not understood or undefined and little agreement exists with regard to the critical components of a business model. Rappa (2000) presents a comprehensive overview of different business models and makes a classification of 29 different types of business models into nine categories. Osterwalder (2004) describes a business model as consisting of several related building blocks that describe the different elements of an organization. To establish some clarity and agreement on the term business model the following characterization of a business model is used throughout this study (Johnson et al, 2008). The elements of a successful business model comprise four components. When these four elements are taken together they create and deliver value in a sustainable manner. These four interrelating elements are: the Customer Value Proposition, Profit Formula, Key Resources and Key Processes. The first two define the value for the customer and the organization itself, the latter give a description as to how that value will be delivered to both of the involved parties. By identifying the value proposition and the profit formula, it becomes clear what resources and processes are essential to create an enduring competitive advantage. For the purpose of this study, key resources and key processes are handled together as they are intertwined.

It should be noted that one element that also determines organizational performance, competition, is not included in the description of a business model (Magretta, 2002). This factor is accounted for when formulating a company’s strategy.

The framework described above seems to be rather straightforward, but its power lies in describing the different pieces and examining how the pieces fit together in a consistent and complementary way. The identification of their interdependencies helps to build a system in which the different parts link to each other in order to support a stable and viable organization (Johnson et al, 2008).

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revealed and help to identify what needs to be done to seize the opportunity of delivering MES in an effective and profitable manner.

2.3.1 Customer value proposition

Johnson et al (2008) argue that the most important to get right is, above all, the Customer Value Proposition. The value proposition encompasses a description of the (different) target customer segment(s), their challenges and the services that can be delivered to solve a challenge or fulfil a need for the customer. Many companies stumble when trying to offer new services (Johansson et al, 2003). At Philips Healthcare, no extensive description and segmentation have been made of potential MES customers and their strategies and tactics have not been identified. At this time, all Hospitals and imaging centres with radiology, cardiology, ICU (Intensive Care Unit), OR (Operating Room), ER (Emergency Room) and oncology departments are considered potential customers. No distinction has been made between different Hospitals that pursue different strategic objectives and thus have

different requirements with respect to their service needs. For example, for some Hospitals the chance to go from capital expenditure to operational expenses may be an essential factor to consider

implementing MES, while other Hospitals may regard the outsourcing of procurement and operations as the main discriminating factor.

At this moment, leads are often randomly followed which results in a disparate spread of the available resources as no prioritization of the target customer / market exists. This results in an ad-hoc approach of the market and the customer segments, which undermines the goal to gain leadership in a particular segment and to leverage that position to win related segments.

Philips GSSI (Global Sales and Service International) has developed some documents and

presentations that give an impression of the services that can be offered within MES. However, no extensive list has been drawn up to identify in detail what elements can or cannot be included within the MES offering and what they encompass. Currently, the venture is often perceived (internally) as a way to sell more equipment. This is not in line with how PHS wants to position MES in the current organization. A better understanding must be created of what MES encompasses and of all the elements that the (potential) customer would like to outsource in order to be able to focus on its core business: providing care. Philips Healthcare should adopt a market-driven thinking that encompasses working together in partnership relations and offering integrated services that create value for the customer.

2.3.2 Profit formula

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The revenue model indicates how much money can be made. For a service offering like MES this calculation is more difficult than simply making the calculation of price x volume. The idea beyond MES is that by bundling products and services, the service creates value that is higher than the sum of its constituent parts. For example, by transferring the management of facilities, transferring the risks and a payment system that is related to performance (incorporating penalty clauses) value can be created for the client. This makes it possible to charge a premium to its customers.

Philips has made the estimation that in the UK alone, 100 new hospitals are going to be built and equipped using the MES model (Philips: BOM memo PFI). In addition, several other countries, including the Netherlands, South Africa, the United Arab Emirates, Spain, Germany etc. are seriously considering using the MES scheme in the future. Thus, Philips believes that this business model will become an important factor in certain markets within and outside Europe. However, it is hard to predict how fast the market will change. The MES business model is expected to generate substantial contract values (ranging from €10 - €150 million per customer) with a longer contract duration (10 – 20 years). To give an example, PHS EMEA (Europe, Middle East and Africa) estimates a €150 million order intake in 2009, growing to € 250 million after three years. A note needs to be made since it is believed that MES is expected to partly replace the current equipment sales and service business in several countries. It is however hard to predict how much influence, both positive and negative, the introduction of the MES business model will have on the sales of equipment and service.

The cost structure takes into account the costs of key assets, direct costs, indirect costs and economies of scale. Cost structure is mainly driven by the cost of the key resources that are required. MES can be largely implemented within the current organizational infrastructure, but several costs need to be made to be able to offer the services of MES. There is an extensive tool in place that gives the possibility to assess (for internal use) the cost structure for MES on a case-by-case basis. It is possible to make project calculations by entering specific project-related input data, e.g. equipment costs and

maintenance costs. The model calculates what margin and WACC are used to ensure that Philips is making a profit. However, the tool does not help to justify the sales price to the customer and is thus not suited for external use. Furthermore, economies of scale are not taken into account yet because of the relatively small scale of MES in the market.

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can be realized because of the high margins in the management fees and because the responsibility for the risk management is transferred.

One needs to keep in mind that the venture can pay off in more than one way. A premium can be generated on its service offering and additional value can be created for the Hospital. Furthermore, enduring, profitable and mutually beneficial relationships can be built between the healthcare provider, the service provider and other parties involved.

Resource velocity examines how quickly inventory and other assets need to be turned over and how well resources need to be utilized to support the projected volume and profit levels. This includes the lead times, inventory turnover, asset utilization etc. For the purpose of this study, this is too far off and this element is therefore not discussed.

Overall, the profit formula seems to be thoroughly developed for the internal assessment of the value of MES for Philips Healthcare, however, the value of the service from the customer’s perspective is not properly assessed. In the next section, it is examined whether the key resources and processes that are needed to deliver that value are in fact in place.

2.3.3 Key resources and key processes

With key resources assets such as the people, products, facilities, technology, equipment, capabilities, channels, partnerships and brand are meant. These elements are required to deliver the value

proposition to the customer (Johnson et al, 2008). Key processes are defined here as the operational and managerial processes that allow a company to deliver value. Tasks like hiring and training, IT, service development, budgeting and marketing may be some of these essential processes.

Every company needs and owns resources, however, the emphasis here is placed on the ‘key’ resources that are indispensable for the venture to create competitive differentiation. Each business model has specific requirements and conditions. This section will describe the key resources and key processes that need to be developed / adjusted in order to transform the organization and to create value both for the customer and for the organization.

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integrated and interdisciplinary products and services while remaining the single interface with the customer, requires new competencies. Thus, Philips should put more focus on people-related processes like training and development of employees that are involved in the processes of creating partnerships and offering the proposition to the client. A more intensive coordination and integration of different organizational departments is necessary and relationships that are more beneficial should be established with (potential) partners.

Because of Philips’ traditional manufacturing background, the focus has been for years on creating product and service specific knowledge instead of on the interdisciplinary creation and distribution of knowledge. The sales department requires new capabilities to create strategic value. It is not yet trained to take a proactive approach towards potential customers, it is not used to the longer sales cycles and not trained to employ consultative selling to create strategic value for the customer. In addition, the performance and remuneration system have not been adjusted according to these new requirements. Furthermore, new competencies are not yet fully developed to deal with the intensive bidding process, contract- and implementation management and risk and mitigation management. Overall, the framework shows that most of the key resources and key processes that are needed to deliver MES seem to be in place. However, a refined and updated value proposition, encompassing a description of the service offering and its deliverables, needs to be developed to benefit maximally from the potential of the MES offering.

2.4 Conclusion

The challenge as presented by Philips points to an inadequately developed customer value proposition for MES. With the help of the Bell-Mason diagnostic and the framework for business models, the MES business model has been examined in order to determine whether this could be validated. The elements and the structure of the frameworks determine the basis on which the business model is diagnosed. Overall, the Bell-Mason profile of MES as developed at Philips Healthcare indicates that MES is currently in the ‘seed’ phase of its development but several areas need to be improved to make the transition to the next phase. The framework for business models supports this conclusion. Most of the key resources and key processes that are needed to deliver MES are in place but a refined and updated value proposition needs to be developed in order to benefit maximally from the potential of the MES offering.

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3. Design of the MES customer value proposition

In this chapter a design of the MES customer value proposition is presented. This proposition consists of several elements. The chapter starts with an identification of the wants and needs of the Hospital and the service elements of MES are described in-depth. Thereafter, the key drivers of value creation are identified and examined. MES requires a higher annual investment than the alternatives (DMO and PSC) but the non-financial benefits of adopting a MES contract to the management of the client’s equipment and the transfer of risks can outweigh these costs. In order to make clear to the client that the higher costs of implementing MES can be justified, the benefits of MES and the transfer of risks are introduced. These form the essential inputs for the economic appraisal model that is described last. In this model a consideration can be made between the costs, non-financial benefits and transferred risks under the three alternatives.

3.2 Philips’ service offerings

In order to understand what MES truly delivers, all services that can be included in a MES contract and their accompanying benefits need to be assessed. However, as mentioned in the previous chapter, to build a good business model it is essential to understand who the customer is and what the customer values. Therefore, this section starts with an examination of the wants and needs of the client, the Hospital. Following, a thorough assessment is made of all the services that can be included in a Managed Equipment Service contract.

3.2.1 Hospitals’ strategies and objectives

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Solving the services challenge Figure 4: Hospitals’ strategies and objectives.

3.2.2 Categorization of MES’ services and their accompanying benefits

In the previous section an understanding has been created of what strategies Hospitals have developed. In order to understand the potential of MES and how it can help to deliver these strategies, the

activities that the service (can) encompass need to be identified and communicated to the customer. It is important to understand, both from an internal point of view and from the view of the customer, how the services are linked to each other and what fundamental benefits they generate for the

customer. Therefore, this section identifies what services Philips’ MES encompasses. A categorization is made of all the MES activities as they can be offered by Philips. The key activities are worked out in detail into eight main services which are split into sub-services. These sub-services can be

separately selected by the client (although in most cases it is logical that sub-service ‘a’ is necessary in

Hospitals main

strategic objectives

1. Provide high quality of patient care and superior clinical outcomes. 2. Provide services on a timely basis: reduce waiting times and waiting lists. 3. Offer good clinical treatment at an affordable price.

9. Achieve status of nationally recognized centre of excellence for education and innovative research. 8. Develop specialist services.

7. The right staff, with the right training and excellent education, in the right place at the right time.

6. More care closer to patients' homes. 5. Install and maintain modern, fit for purpose facilities and equipment. 4. Deliver healthcare in a pleasant, safe and clean environment.

-Strengthen quality assurance and control

-Develop patient involvement and experience programs -Focus on service development and improvements -Optimally use and increase capacity

-Reduce waiting times

-Reduce nr of cancelled operations due to unavailability

-Prevent unnecessary Hospital admissions -Perform services (surgery) on a day case basis

-Promote innovation, education and research -Strengthen links with academic partners

-Set-up of formal teaching and research structures -Recruit and develop people who can provide specialist services and use the latest techniques

-Work in partnerships to improve learning

-Build an excellent reputation wrt training/education -Value relationships with staff, members and partners -Develop opportunities for appealing career paths -Procure technology that makes the delivery of services in the community (homecare) possible

-Better liaisons with other healthcare providers -Modernize and transform facilities and equipment -Respond adequately to changing medical practice -Use new technologies to share knowledge -Improve facilities to reduce the risk of infection -Ensure all staff is thoroughly trained

-Reduce medical errors