How are tech companies tracking customer consumption?

For the past year, TSIA has been conducting research related to how our member companies understand how their customers are actually consuming technology offers. We call this field of research “Consumption Analytics.”  This field is becoming critical as customers migrate to “technology as a service” business models where they only pay for what they actually consume.

Currently, we are conducting an industry survey on the topic. Below is information on how you can participate and receive the insights from the survey data.

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What metrics should we measure, and how can we leverage that information to improve our services? The choices are many, and it’s a challenge that transverses all service disciplines. If you are actively monitoring and utilizing streams of product and service data, or if you are just starting to create your analytics plan, we invite you to participate in TSIA’s Adoption, Consumption, and Outcome Metrics Survey:

Click here to participate in the survey

This 20-minute, 13-question survey will collect core data on how companies measure purchase, installation, consumption, and outcome metrics; and more importantly, how they leverage these data streams. All participants, regardless of their analytics process maturity, will receive a summary of the data collected and be invited to a private webinar discussing the results.

Deadline for submission is Wednesday, December 17, 2014.

Thank you for your support of this important research initiative. For questions on this research, please contact Jeremy DalleTezze at jeremy.dalletezze@tsia.com.

 

 

 

Digging Economic Moats

Dear Reader:

So sorry it has been so long since I have posted on this blog. At TSIA, we have been very busy helping our members navigate through the current industry transformation related to technology business models.

If you missed us at our most recent conference in Vegas last month, I am posting a link to my keynote.
https://www.youtube.com/watch?v=92q360ckbsk&feature=youtu.be

In this presentation, I ask and answer the following four questions:

1. What are the attributes of highly profitable revenue?
2. Why are technology companies facing a potentially dramatic decrease in profitability?
3. Why are emerging technology as a service companies not generating profitable revenue?
4. What can be done to make technology as a service a profitable business model?

For TSIA members, this a paper that supports this presentation:

http://www.tsia.com/documents/Digging_Economic_Moats_for_XaaS_Business_Models/

Enjoy!

So you want to sell outcomes?

In the book B4B, we predict that technology customers will begin pressuring technology providers to commit to outcomes.  In other words, customers will not want to pay for technology up front and hope they achieve some target outcome. Customers will want their technology providers to assure the outcome is achievable. This is not how the vast majority of technology providers are paid today. In today’s model, technology providers are paid up front for their technology wares. Then, the customer pays more to the technology provider (or service providers) to achieve a target outcome. If the customer never crosses the outcome goal line, the technology provider is rarely forced to provide a refund. How many tens of thousands of ERP and CRM systems have been purchased in the last twenty years? How many thousands of those implementations failed? Yet, how few times we have read where the technology provider was being held accountable for the failure. That painful gap between the promise of what was sold up front and the reality of what was delivered is closing.

With the release of B4B, we have been overwhelmed by the support of the general premise: successful businesses will be committed to their customers’ success. This means technology providers will commit to helping their customers achieve specific business outcomes. Enterprise technology customers are loudly telling us this shift is long overdue.  Technology providers are quietly agreeing. In fact, we are beginning to see real world examples of technology providers committing to outcomes.

In my keynote at TSW in October, I mentioned four technology companies that are selling outcomes:

Google

Google makes almost every bit of its profits by selling ads. If you have ever leverage Google Ads, you know that you only pay Google if and when a potential customer clicks on your ad. You don’t pay Google just for the privilege of displaying the ad.

Rackspace

Graham Weston, the co-founder and Chairman of Rackspace, spoke at TSW. Rackspace has built their entire business model on the premise that customers should only pay for the computing power they need to consume right now.

Satmap

SATMAP has advanced artificial intelligence and pattern recognition technology to help optimize call enter interactions. What is really interesting, is that they will install that technology at no charge to the customer. They will only get paid when the customer achieves specific KPI improvements such as higher customer satisfaction ratings or higher agent productivity. From the Satmap website:

ALL RESULTS, ZERO RISK

We partner with clients to provide SATMAP both on a licensed and on a pure benefit-share basis.

In both cases, SATMAP requires no up-front capital investment. We take care of setup and deployment; you see the results.

Redflex

Redflex sells red light camera technology to cities. Like Satmap, Redflex does not charge cities huge upfront fees for the technology and implementation of the technology. Instead, Redflex takes a percentage of every ticket issued to motorists that run a red light.

These examples are excellent reference points for technology companies that want to get into the business of selling outcomes.  They represent the three types of outcomes technology companies can potentially market:

• Type 1: Consumption as an Outcome. The customer only pays when they actually consume something. The outcome is the usage. Google Ads and Rackspace are Type 1 offers.
• Type 2:  KPI as an Outcome. The customer only pays when they have achieved an agreed upon target KPI. For example, customer retention rates improving by 5%. Satmap has a Type 2 offer.
• Type 3: Financial Improvement as an Outcome. The customer only pays when specific financial gains have been achieved (cost savings or increased revenue). Redflex has a Type 3 offer.

Figure 1 shows this spectrum of outcome based technology offerings. If you want to get in the business of selling outcomes, this taxonomy is a great place to start the conversation. Especially since it gets harder as you move from Type 1 to Type 2 to Type 3 offerings. So, what types of outcome offerings is your technology organization developing? If the answer is “none” I strongly recommend you send a copy of B4B to your Product and Sales leadership teams–and hope they read it before your customers do.

Reaction to B4B

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.

Outcome Based Services Portfolio

With the release of the book B4B this October, TSIA is focused on helping technology companies. Helping these companies brace for a radical shift in their business models. A shift away from selling product assets and produce attach services to delivering business outcomes for customers.
As stepping stone in this journey, TSIA is working with member companies to create a set of frameworks related to outcome based services. These frameworks will cover:
-Three different levels of outcome based services
-The process for successfully defining an outcome based service
-Outcome based pricing models
-Taxonomy for outcome based offerings

During my keynote at TSW in Vegas this October, I will be walking through some of these frameworks. As a step in journey, I wanted to publish a taxonomy for outcome based technology service offerings. This taxonomy is based on the offers we see emerging in the marketplace and the offers we believe technology companies will eventually need to establish. A white paper on this taxonomy will be released at TSW. Enjoy!

The historical service lines outlined in the opening section of this paper (professional services, education services, support services, etc.) all offer capabilities focused on the technology asset. As the service portfolio shifts to being more focused on business outcomes, these traditional service categories become less relevant. What is the specific business challenge the technology provider can solve for the customer? This is what becomes relevant. Instead of services that are centered on keeping the technology asset up and running, the technology provider will have services that are designed to reduce operational complexity, accelerate the usage of technical capabilities, and ultimately deliver quantifiable business impact. As the services portfolio shifts from left to right, there are natural categories of service offerings that product companies can choose to offer:

Optimize Services

These are services designed to help customers optimize their use of technology capabilities. There are two distinct types of optimize services TSIA believes product companies will provide to customers:

•  Operational Services. These are services designed to reduce operational complexity for customers. They include capacity planning, remote monitoring, risk audits, and system administration. The main objective of these services is to minimize the cost of operating a technology.
• Adoption Services. These are services designed to help customers maximize their usage of technical capabilities. Unlike traditional education services, these services involve usage analytics, user adoption reports, and intelligent feature provisioning. The main objective of these services is to maximize technology adoption.

Outcome as a Service

These are not the historical “bundles” created by product companies where service offerings are wrapped around a product and sold to the customer at some bundled price. These are offerings where a provider bundles the products and services required to guarantee a target business outcome for the customer. In other words, the provider is masking any complexity from the customer and simply committing to deliver a specific outcome for the customer. A simple real world example of this service category would be how red light camera technology is sold to cities throughout the country. Cities do not pay for the cameras or the installation of the cameras. The vendor is given a percentage of each ticket (the outcome) issued from the cameras. The figure below highlights these emerging service categories.

 

Figure 3: The New Services Portfolio

Some of these new service categories are names that are not commonly used in the marketplace. Yet, technology companies are already migrating their services into these categories. Software giant Oracle offers “Advanced Customer Services” designed to monitor systems and reduce operational complexity. SaaS provider salesforce.com has a set of “Premier Success” services that are designed to monitor usage and help customers accelerate adoption. And Siemens offers workflow optimization services for laboratories using Siemens equipment. It will be important for product companies to clearly define these four categories of service offerings. Why? To reduce the tensions already emerging between legacy service lines. Existing Support Services, Professional Services, Field Services, and Managed Services organizations within the same product companies are stepping on each other with competing and overlapping service offers. This redundancy is costly to the product company and confusing to the customer. Which leads to another emerging topic at TSIA: Outcome Based Organizational Structures. But that is a topic for another day.

B4B has Begun

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

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:

• The SaaS Business Model
• Double Click on the SaaS Business Model

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

• The unprofitable SaaS business model trap

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

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

The Case for Centralized Services

There is a debate that occasionally resurfaces within companies that have multiple business units:

Should Professional Services be distributed within each business unit or centralized to support all the business units?

There are three compelling arguments for distributing PS into each business unit:

• The PS capability can be customized to meet the unique needs of each business unit
• The GM of the business unit can have direct control of the resources required to implement the products of the business unit
• PS experts will create tighter relationships with the R&D staff building the products

All three of these points have merit. However, the most recent data from TSIA organizational structure surveys shows that the vast majority of technology companies DO NOT distribute Professional Services into each business unit. Instead, they create a global PS capability that supports the needs of all the business units. Why is this the predominate model? There are four critical economies of scale that drive this decision:

1. Reduction of management overhead: By creating one PS organization, there is an opportunity to minimize the amount of non-billable management headcount required to support PS activities.
2. Reduction of duplicate processes: Having multiple business units spinning up PS processes is less than optimal.
3. Opportunity to cross-pollinate: By having one PS organization supporting multiple products, there are opportunities to share best practices in design and implementation across technologies.
4. Critical mass of delivery resources: Finally, most importantly, the PS business is a lumpy project based business. The more projects in play, the more opportunity to smooth out resourcing requirements across those projects. Smaller PS organizations embedded in business units often struggle to reach a critical mass of headcount to sustain profitability.

In addition to the economies of scale, there are other reasons to not embed PS into product oriented business units:

• Free projects: Business units focused on making product often have a tendency to give services away in order to secure product deals. This approach quickly makes PS an expensive cost of sales capability.
• Lack of service processes: Product oriented business units often have little experience or little interest in maturing the processes required to deliver profitable services. Service pricing, risk assessment, project management, scope management, skills development, and resource planning are but a few of the processes critical to service success but foreign to product business units.
• Cannibalization of delivery resources: Finally, PS organizations that are integrated into business units often find themselves on the short end of the headcount conversation. Product Engineering, Product Marketing, and Product Sales all receive a higher priority when it comes to resource allocation. This can leave the PS team struggling to build critical mass.

Several years ago I had the opportunity to interview John Swainson when he was the CEO of CA. At the time, some of the CA management team was debating the optimal organizational configuration for Professional Services. Mr. Swainson has a long tenure in tech, including 26 years at IBM. During our conversation, I recall he made some astute observations:

I have seen PS organized three ways: decentralized with R&D into business units, centralized but reporting to sales, centralized and separate from sales. The last model is the only one I have ever seen where PS doesn’t become a cost burden to the company. Sales has a tendency to give services away. R&D doesn’t really want to manage a services P&L.

Words of wisdom from a seasoned tech exec. Having a separate PS organization can create tension with both sales and product leaders. However, it is a healthy and required tension that serves the company well. If an independent PS organization is not aggressively managing project costs and risks, who is?

Double Click on the SaaS Business Model

Current Wisdom

Yesterday, my colleague Maria Manning Chapman forwarded me an article from Tien Tzuo, a former marketing executive at salesforce.com:

Wall Street Loves Workday, but Doesn’t Understand Subscription Businesses

I strongly agree with his title but vehemently disagree with the content in his article. Mr. Tzuo makes a compelling argument for why it is justified for SaaS based companies such as Workday to receive such outrageous valuations.  The crux of his argument rests on the importance of “deferred’ or “unearned” revenues. Currently, salesforce.com is sitting on top of over three billion dollars in deferred revenues. In their last annual report, Workday stated they have almost $300M in unearned revenues. To date, investors are clearly bought into the importance of these deferred revenues. The table below stacks Workday next to Oracle. As can be seen, Oracle out strips Workday in all key financial metrics except one: deferred revenues. Clearly Mr. Tzuo is on to something.

 

Fly in the Ointment

As Mr. Tzuo correctly points out, stock price of any company is a function of FUTURE potential, not past results. When a company has so much deferred revenue already on the books, the future looks very bright indeed. But, what if in the future, a company does not make any profit with these currently deferred revenues?  What in the future all of that deferred revenue and additional booked revenue barely pays the bills for running the company? Would investors still be so excited about the future of the company?

Theory of SaaS Profitability

SaaS companies are running to a pretty straight forward business model. They build platforms. As more customers get on those platforms, revenues will eventually outpace expenses and the business will generate profits. The image below documents the theory. All SaaS companies are navigating how to maximize upfront investment costs to propel them over to profitability.

The Realities of SaaS Profitability

The challenge with the theory of SaaS profitability is that is has been under accounting four critical factors:

1. The increasing costs to support and serve customers
2. The increasing costs of acquiring new customers
3. The downward pressure on subscription pricing (as markets become competitive)
4. The percentage of deferred revenue that becomes bad debt

Each one of these factors deserves a TSIA research paper in itself, so I will not elaborate further on them in this blog entry. I will only state that these factors are proving significant and they are resulting in SaaS business models that look more like the model below. This graph is the one you will clearly see reflected in the public data of companies like salesforce and Workday.

In reality, I am a massive fan of subscription based models for technology. Our last book, Consumption Economics, makes the case for why the entire technology industry will be moving to this model. However, I am gravely concerned that both investors and technology executives are unclear concerning the factors that will ultimately drive sustainable and profitable business models in this new world. A large chunk of deferred revenue, alone, will not guarantee profitability.