Embedded professional service organizations have always struggled with their ability to define the total positive impact they have on company fortunes. For example, how much of the product’s sales were pulled through by professional service engagements? How many frustrated customers were saved by PS involvement? How many new products only succeeded because PS secured the first reference account?
Wouldn’t it be great if every service organization could draw a correlation graph like the one below that shows how increasing service engagement increases account profitability?
TPSA classifies this dialogue under the concept of economic impact analysis: The process service organizations use to calculate the impact of service activities on total company economic success. Unfortunately, I believe the task of calculating economic impact to be one of the most immature disciplines in the TPS industry.
To help mature this area, TPSA created an industry task force on the topic back in 2005. Since that first task force met, progress has been slow but sure. Specifically, the TPSA community has achieved the following milestones regarding economic impact analysis:
Defined a taxonomy for the topic
Identified a set of 43 economic impact metrics service organizations could potentially track
Identified the economic impact metrics companies are most likely to track
Identified the critical drivers required for a service organization to successfully track economic impact
Found a member company that successfully conducted economic impact analysis that fundamentally changed how headcount investments were made in the PS organization
Published a process overview document for how to implement an economic impact tracking program
At this point in time, TPSA is working with member companies to create an industry baseline on the impact of service engagement on the following three key economic impact metrics:
product revenue growth
Our goals is to create an industry baseline companies can use when debating the impact of services on these metrics—even before they conduct economic impact analysis on their specific accounts.
In this entry, I want to discuss the critical drivers for needing to conduct this type of analysis and the first step in the process. This will provide a starting point for companies that want to embark on this often difficult but rewarding journey.
The goal of understanding how PS influences other economics within the company has been on the radar screen for a very long time within product companies. However, shrinking product margins have brought this question to the forefront of management discussions. Specifically, there are three catalysts that will motivate a PS organization to execute detailed economic impact analysis of PS activities:
1. Potential shift in service delivery strategy: The company is considering a push of service activity to partners. Executive management is frustrated by poor financial performance of service engagements. However, executive management would like to know what the total potential economic impact would be of such a move.
2. Push to increase service profitability: Service organization is under renewed pressure to improve profitability. The service management team needs to educate executive management on the impact of service activities beyond service profits.
3. Prioritization of service investments: Executive management is reviewing investment decisions and the company wants to understand what service activities have the greatest impact on overall company success. These are the service activities that will ultimately receive the most investment.
Once a critical driver occurs, the service organization must begin the process of actually conducting economic impact analysis that will be accurate and credible. In the first step of this journey, the professional service organization needs the executive management team of the company to identify what metrics are being used to measure the overall success of current company initiatives. There are several metrics which companies may be focused on in any given point in time:
-Number of new customers acquired
-Total company revenues
-Percent of revenue from SMB customers
-Product sales growth
-Average monthly recurring revenue per customer
-Average customer profitability
None of these metrics is inherently better than the other. The only thing that matters in this first step is what specific success metrics the executive team is focused on now. The service organization must understand what metrics the executive team is trying to influence. At one of the TPSA member companies that successfully conducted EIA analysis, the executive team was focused on three key success metrics:
The total monthly recurring revenue for strategic customer accounts
The product renewal rate of customers
The average deal size with customers
Once the service organization understands what metrics the executive management is trying to move, services can conduct the required analysis that determines how service engagement impacts those specific metrics. Of course, presenting the results of that analysis in a way that resonates with executive staff is a key component of success.