Archive for the ‘Industry Trends’ Category

Reaction to B4B

October 29, 2013

In Vegas last week, over 1,000 professionals from the technology industry gathered at the Technology Services World conference where our latest book, B4B was officially released.
 

The overarching premise of TSIA’s latest book B4B is quite simple:
The operating models of technology providers are about to be revolutionized.

Why? The historical operating model of technology providers was designed to optimize a supplier’s “push” of prepackaged products to customers via large, up-­‐front deals. The goal was usually to get the maximum amount of product assets transferred from the supplier’s balance sheet to the customer’s balance sheet in one big order. However, two trends are dismantling this historical model. First of all, the value of the core technology asset is commoditizing. Technology companies are not achieving the same margins they once did when they sold a technology asset to the customer. Commoditization is a well-known challenge to many hardware companies, but the trend is expanding to software companies as low prices SaaS models reset customer expectations. Secondly, customers are pursuing new consumption models that do not involve a large up front product purchase. This is forcing technology companies to create new ways to offer their technology where the customer pays as they consume. These two trends of “commodization” and “new consumption models” are dismantling the historical economic engines of most technology companies. So what to do?
TSIA believes that revenues and margins in the technology industry will be directly tied with the ability to help customers achieve actual business results. Instead of focusing on features, successful technology companies will focus on realized value. This means technology providers will have to embrace the following success tactics:

  • Align technology and service offerings to specific business value for the customer
  • Define and deliver services that accelerate the consumption of technology capabilities
  • Define and deliver services that drive specific business outcomes for customers
  • Modify pricing models so that customers only pay when they achieve specific business value from the technology
  • Leverage data streams from the product to clearly understand how customers are using technology
  • Employ analytics to clearly understand how customers can achieve the greatest ROI from technology assets

These are but a few of the tactics technology providers will need to embrace to succeed in the next generation of the B2B relationship.

At TSW last week, we spent three days discussing and debating this fundamental shift facing technology providers. TSIA CEO JB Wood overviewed the B4B framework for the audience. Keynote speaker Graham Weston, the founder and Chairman of Rackspace, provided a compelling case study for what the next generation of technology providers will need to look like. Nick Earle, who manages Global Field Service Operations for Cisco, spoke specifically how Cisco has embraced the B4B framework to help transform its business model. I ended the conference by overviewing how B4B concepts will impact the financial models, service offerings, and organizational structures of all technology providers.

 

If you missed this conference, you missed a watershed event for the technology industry. In my mind, this event marked a moment in time when hundreds of technology companies acknowledged that their traditional business models would need to change. The question facing all of these companies has become quite simple: What does our new business model look like? B4B provides a compelling framework to craft that new business model. And based on the reaction in Vegas last week, the framework seems right on the mark.

 
All of the keynotes were videotaped. If you are interested in watching them, please send me an email and I will notify you when they are available online.

B4B has Begun

September 13, 2013

Sorry I have been so silent lately on this blog. I have been heads down collaborating on a new book titled B4B. The historical business models of technology providers are imploding in front of our eyes–and this is why we needed to write this book. What do the new business models look like for traditional hardware and software companies?

B4B hits the streets next month at our Technology Services World conference in Vegas.

If you are interested in reading the first chapter, visit: http://www.tsia.com/members.html

Meanwhile, the real world examples of how the concepts outlined in B4B just keep popping. Cisco has always had an economic engine centered on product revenues and margins. As we discuss in B4B, that economic engine is commoditizing. Companies like Cisco will need to transition their economic engines. And the transitions have begun:

The move reflects two stated priorities of Cisco CEO John Chambers: to bolster Cisco’s overall security business and to rapidly expand Cisco Services operation in an effort to become the world’s largest IT company. In other words, Chambers wants to transform Cisco into an IBM with networking roots.

from Cisco adds Security Practice

The problem, however, is that Cisco (or any other hardware company) doesn’t really want to become another IBM. Have you looked at IBM’s top line growth numbers lately? No, product companies like Cisco need to become something very different than what IBM is today. And that is why we wrote the book. Can’t wait for Vegas.

Scrutiny on the SaaS Business Model

July 24, 2013

Every since TSIA started our tracker of publicly traded cloud computing companies (The TSIA Cloud 20), I have been questioning the financial business model of SaaS companies:

Today, a colleague pointed me to a blog entry that also finds reasons for concern:

Read all three of these blog entries. Is there something we are missing? Or, as TSIA would argue, will SaaS providers need to fundamentally change the way they operate in order to achieve long-term profitability?

 

Blown Away by Analytics

July 6, 2013

Back in 2005, I started an industry tracker titled “The Service 50.” Since then, TSIA has been publishing a quarterly snapshot of 50 of the largest publicly traded hardware, software, and pure-play services companies in the world. We have been examining several key financial performance indicators:

  • Overall revenue growth.
  • Product and service revenue growth.
  • Product–service revenue mix.
  • Product margins.
  • Services margins.

Part of the reason for doing this quarterly analysis is to provide the industry with a single, comprehensive repository of these indicators.  This index has provided clear evidence of the following technology industry trends:

  • Strong overall growth. Since 2005, at least, the technology services industry has been steadily growing. In fact, the total technology revenue of the Service 50 has grown from $99 billion in Q3 2005 to almost $240 billion in Q2 2012, more than doubling in about seven years.
  • Strong services growth. In the same time frame, the total Service 50 also more than doubled, increasing from $48 billion in Q3 2005 to over $100 billion in Q2 2012.
  • Average services revenue share increasing for product companies. While gross product revenue growth has kept pace with total gross services revenue growth, the average revenue share of services within mixed-revenue companies, i.e., those companies with a combination of product and services revenue, has steadily increased, from a little over 40% of revenue to over 50% of total revenue.

So the technology industry has seen steady growth in recent years. And while the growth slowed considerably during the 2007–2009 downturn, it is clear that the services revenue stream has become increasingly important for technology product companies.

Of course, the $64,000 question is: What is the relationship between services performance and the overall financial performance of a technology company? Especially as a technology grows and matures.

The answer to this question lies within the raw data points of the TSIA Service 50 and analytical techniques to model the influence of services on the overall business model performance. Well, fortunately, TSIA has access to both of these items. In June, we hired a PhD who has been specializing in data analytics. Jeremy DalleTezze now serves as the Director of Analytics for TSIA. As part of the TSIA research team, he has two key charters:

  • Apply new analytical techniques to existing TSIA datasets.
    • TSIA believes there are entire new level of service business insights waiting to be unlocked from existing TSIA research datasets by developing and applying new analytical models.

 

  • Develop Frameworks for Consumption Analytics
    • TSIA believes data analytics will be a critical capability for service organizations as they mine customer usage data to develop impactful service offerings.  Jeremy is collaborating with TSIA researchers, TSIA members and TSIA partners to develop a framework technology companies can follow as they stand up and mature consumption analytic capabilities.

So, to get a taste of the power of analytics, TSIA members can read Jeremy’s analysis of the TSIA Service 50 data as he worked to answer that $64,000 question: What is the relationship between services performance and the overall financial performance of a technology company? To get the answer, download the paper: http://www.tsia.com/documents/The_Return_on_Services

If you have questions about the modeling, contact Jeremy directly: jeremy.dalletezze@tsia.com

Unsustainable Competitive Advantage

March 6, 2013

This week, I read a scathing article on the demise of Michael Porter’s consulting firm:

What Killed Michael Porter’s Monitor Group? The One Force That Really Matters

If you are in management, you will find this article fascinating. If you are in the habit of using expensive “strategy” consultants, you will find this article both fascinating and discomforting.

Beyond its general insights, this article contains a timely message for technology companies. Michael Porter has argued for years that companies should identify “sustainable competitive advantages” that are hard to replicate. These advantages translate to higher company profits. As this article highlights, in reality, THERE ARE NO LONG TERM SUSTAINABLE COMPETIVE ADVANTAGES. Unless a company has an unfair advantage through government regulation or some other market anomaly, ALL CAPABILITIES can eventually be replicated.

The technology industry has enjoyed very high margins and profits over the past forty years. In mature industries, best in class companies can be expected to generate an operating income of  8% to 15%. In tech, companies are expected to generate operating incomes above 20%. Today, there are tech companies generating operating incomes well north of 30%.

Past success has made tech executives believe their high margin business models should be the perpetual norm.  I would argue these business models are a function of unsustainable competitive advantage.  These business models are a result of consumption models that require customers to make massive up front commitments to technology—and then make it very difficult for customers to change their mind if they are not satisfied with their decision. This approach to technology consumption is not sustainable. Business customers are rapidly exploring new “pay as you go” models designed to match value received with the price paid. In other words, the tech industry is gravitating to more normal market dynamics between buyer and seller.

Our last book, Consumption Economics, has become one of the top five sellers on Amazon in the category of high tech investment:

Amazon Best Sellers

This book defines how tech business models will need to rapidly change as the tech market matures. Many in the industry have read the book. Some readers believe the book is an accurate portrayal of how the tech industry will change. Some readers are convinced their high margin business models will not be changing anytime soon. For all past and future readers of the book, I would repeat these words:   THERE ARE NO LONG TERM SUSTAINABLE COMPETIVE ADVANTAGES.   The consumption models in tech are changing. Get ready.

Industrialized Services

February 25, 2013

There is a concerted effort in the technology industry to provide professional service offerings that are fixed cost, low risk, and high value. These offers are sometimes called “packages”, “productized solutions”, or “industrialized services.” Regardless of the title, these types of service offerings have the same key attributes:

  • They are well defined and highly engineered to reduce delivery risk
  • They leverage delivery tools and methodologies to reduce the amount of hours required to deliver
  • They are designed to be highly repeatable from customer to customer

As more PS organizations swing the pendulum of their services from “custom and labor intensive” to “engineered and optimized,” TSIA is hearing a common service business challenge: What are the organizational capabilities required to successfully build and deploy industrialized service offerings?

Build it and They May Not Come

The concept of codifying PS expertise into delivery methodologies and tools to reduce both risk and delivery effort is by no means new or revolutionary. However, the successful execution of this concept continues to elude most PS organizations.  Why? I would argue there are three key reasons:

  1. The service organizations define and develop service offerings based on their strengths—not their customer needs.
  2. Service organizations attempt to market these offerings on features and not business value.
  3. Even if the service organization has defined compelling offerings that could deliver business value to customers, the services organization fails in executing the services consistently on a global basis.

These failures occur because the service organization does not have the required organizational capabilities to truly execute industrialized services.

 

Organizational Capabilities Required to Execute Industrialized Services

Before a service organization jumps on the “engineered” or “industrialized” services party train, TSIA recommends the organization assess the effectiveness of the following organizational capabilities:

  1. Value Proposition: The ability to engineer service offerings that deliver valuable customer benefits and clear points of competitive differentiation.
  2. Value Based Pricing: The ability to set prices for fixed priced service offerings that are based on the value proposition of the solution.
  3. Solution Components: The understanding of what assets truly reduce engagement effort and risk.
  4. Service Development Life Cycle: A mature and effective service development life cycle for professional services offerings.
  5. IP Asset Reuse: The ability to maximize the reuse of all relevant existing services assets in service engagements.
  6. Field Enablement: The processes and programs to enable regional services staff to delivery target offerings.

These are not the only organizational capabilities required to drive the market success of industrialized offerings, but these are table stakes. If your company has poorly defined processes or weak skills in one of these categories, your ability to drive industrialized services will be hampered.

TSIA has observed that PS organizations that pursue industrialized offerings can quickly create datasheets describing the offerings. However, without the organizational capabilities described above firmly in place, the offerings never reach their theoretical potential.

Acme Packet and Dell: Two Sides of the Same Coin

February 5, 2013

There were two events that happened this week in the technology industry that speaks volumes to how the financial models in the industry will be shifting dramatically over the next few years.

First of all, Oracle made a surprise acquisition of Acme Packet. Acme Packet is a classic hardware company selling to telecom carriers. Acme currently makes almost 80% of their revenue on selling high margin hardware. They wrap high margin support services around that around to generate a 80% gross margin business. Beautiful. Isn’t this the business model that any hardware company would envy?

Acme

The problem is that Acme’s is spending over 34% of their revenues on sales and marketing. The industry that they are in is hyper competitive. The stock has been going nowhere. The future prospects of Acme Packet as an independent hardware company banking on high margin product sales to drive growth and profits seems to be limited. Oracle is looking to broaden into the world of networking and they saw a unique opportunity to buy their way in. If Acme saw a future of high growth and high profits as an independent company pushing hardware, they would not have sold.

Next, news broke that Dell plans to go private. Last year, Dell made 80% of its revenue from selling products. Their revenue mix looks very similar to Acme Packets. However, Dell products are becoming more and more commoditized. Gross margin on products is running around 20% for Dell. This is my intuition, but I believe Michael Dell is clear that the future of a company making the vast majority of revenue selling hardware is challenged at best. Dell must reengineer the economic gears. And this will be painful. Better to go through this pain as a private company.

Dell

Acme Packet selling to Oracle and Dell going private are really two sides of the same coin. An economic engine based on the vast majority of revenues coming from hardware is under very real duress. Companies in this model need to make bold moves to move off of this model.

This is only the beginning. The historical tech business models are about to be turned upside down. The Dell and the Acme Packet business models were forged in the tech industry over twenty years ago. Personally, I believe product intensive business models are no longer the path to growth and profits. Keep watching the news—this is not the end of interesting headlines.

Service Capabilities Heatmap

December 15, 2012

A new tradition.

TSIA defines organizational capabilities as “the ability to perform actions that achieve desired results.” TSIA maps the capabilities required by all service organizations into the following eight categories:

  1. Strategy and Planning
  2. Offer Development
  3. Sales and Marketing
  4. Talent Management
  5. Service Operations
  6. Partner Management
  7. Technology Infrastructure
  8. Performance Management

In each one of these categories, there are capabilities that a service organization must master to scale and optimize their business.

In the first ten months of 2012, TSIA received over seven hundred inquiries from member companies. Also, TSIA has been surveying member companies regarding the service capabilities they are most interested in improving. Mining that data, there are clear patterns regarding the service capabilities that member companies are
working to establish or refresh.

This month I published a Service Capabilities Heatmap.

These are the top ten service capabilities we sell TSIA members working to optimize as they enter 2013:

  1. Sales Coverage: We effectively align sales resources and channels with the market to cost-effectively sell our service offerings.
  2. Pricing Strategy: We actively manage pricing based on a strong understanding of demand, competitive factors, and business objectives.
  3. Customer Analytics: We have the data streams and expertise to monitor how customers are using our technology and then develop services that are proven to increase adoption of our technology.
  4. Proactive Channel Management: We effectively analyze the cost and quality of all customer interaction channels (phone, email, self-service, chat, online communities, social media) and then influence channel choice, moving customers toward more efficient and less expensive channels.
  5. Services Enablement (issue avoidance): Data and experiences from service engagements effectively influences product development priorities to reduce the cost of implementation and support efforts.
  6. Realtime Dashboards: We leverage enterprise class systems to provide realtime data on critical service performance metrics.
  7. Organizational Structure: We have implemented an effective services organizational structure that optimizes the parameters of service costs, service revenue growth, and customer experience.
  8. Asset Reuse: We maximize the reuse of all relevant existing services assets in new service engagements.
  9. Resource Optimization: Across geographic boundaries, we optimize the mix of resources to services delivery to ensure service success and margin performance.
  10. Managed Service Offering: We have multi-year, annuity based service offerings that help our customers operate and optimize our technology solutions.

For the complete report on 2013 Service Capabilities, send me an email at thomas@tsia.com and I will forward it on to you.

Eleven Things I Learned

November 9, 2012

On the last day of the recent TSW conference, I summarized the key insights I was taking away from my converesations with attendees over the three days. To watch this presentation, visit:

http://vimeo.com/52654677

Below are the insights I cover in the video.

1. Managed Services

  • Growing, profitable, but don’t call it Managed Services.
  • Limit liability? Org structure? Rev Rec? Comp Models? Financial Model?

 

2. Margin Box

  • Fixation on achieving certain margin targets for embedded service business lines. This means we walk away from customer opportunities because they don’t meet a specific target. We could be boxing ourselves in.
  • What matters: Total margin dollars (rev * margin) not margin %

3. Service Controlled R&D

  •  Service executive is given control of 5% to 15% of the product R&D budget. Focus those resources on capabilities that help customers realize value.

4. Solution Managers

  • Not product managers. Not service marketing managers. They are comped on the growth of both product and service revenues.

5. “On site is Insight”

  • Quote from Bill McDermott during his keynote. Why he believes service capabilities are so critical for product companies.

 

6. Success Science

  • You understand what makes your best customers your best customers.
  • Best customers = spend lots with you because they are being successful
  • Do you have a cohesive vision throughout the entire company concerning what makes your best customers your best customers?

7. Place Big Bets

  • Ex: Stand up a business consulting capability
  • Ex: Stand up a hosted version of your product for a customer
  • Ex: Aggressive reskilling program for services (technical to business)

8. Remove the Complexity of Services

  • For your customers
  • More importantly: for your sales force
  • Complexity look like: stove piped service capabilities, overlapping offers, death by a thousand packages

9. Starting up SaaS

  • 2 years to profitability
  • Amount you spend on sales and marketing impacts time to profitability
  • Design of the platform can dramatically impact time to profitability

 

10. Financial Model of Your Company

  1. Has to change
  2. Transition as quick as possible to the best model possible
  3. New model will not be throwing off 25 to 40 points of profit

11. Disenfranchising your team

  • Be savvy about orchestrating change
  • You have to bring the company along with you (R&D, Sales, Finance)
  • Don’t sacrifice your best people in this process

The Service 50 Snapshot

July 31, 2012

The first quarter of this year was rather flat for the fifty technology companies TSIA tracks in the TSIA Service 50. This Thursday I will be reviewing how these companies performed in Q2. Did the bumpy ride continue? Tune in and see how your company performance compares to the broader industry. Also, hear TSIA’s perspective on the key trends that will be impacting the performance of technology solution providers throughout the remainder of the year.

Register for the TSIA Service 50 Webcast

 

 


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