Previously, I wrote about the impact of services on product success. As previously discussed, TPSA is working to create an industry baseline on the impact of service engagement on the following three key economic impact metrics:
- product renewal
- product revenue growth
- account profitability
Our goal is to create an industry baseline companies can use when debating the impact of services on these metrics. As this effort continues, I can tell you the journey will not be short. Product companies simply do not have these critical data points at their fingertips:
- How many hours of services did each account consume over the past two years?
- What is the total blended (product + services) profitability for each account?
- What is the revenue growth for each account?
- What are the product renewal rates per account?
Despite this setback, individual companies are forging ahead and going through the labor intensive process of aggregating these data streams. Watching this work unfold, I want to report on an interesting pattern that is emerging in the data.
But first, why are companies analyzing account behaviors? Because, in the current economy, not understanding if service activity improves company profitability means services headcount is being flattened or reduced. Sometimes the simplest and urgent requirements are the most effective motivators. So, some companies are forging ahead with truly understanding the economics of the entire system: products, professional services, support services, education services, etc. And I want to report an emerging pattern.
Companies often want to answer this fundamental question: Do service engagements pull through product sales? The definitive answer to this question is proving very elusive. Cisco has commented on the pull relationship, but there is no industry validated dataset cutting across multiple companies that definitively proves this product pull correlation. However, as I see companies conduct economic impact analysis on the data of hundreds of existing accounts, they are finding a strong relationship between increased service engagement and stabilized account revenues. In other words, as customers increase their consumption of services, the amount of money they spend on products is more likely to remain the same or increase. And the reverse is true. Customers that are decreasing their product spend are the ones not consuming any services.
There are two powerful ways I have seen this correlation between service engagement and account stability communicated. The first method focuses maps levels of PS engagement to major accounts where product revenue is decreasing. The resulting pie chart determines if there is a correlation between low services engagements and increased risk of the account shrinking. Here is an example of the end result:
I have only seen this analysis conducted a handful of times. Every time I have seen it done, the pie chart tells the same story: a high percentage of the accounts with shrinking product revenues have no significant engagement with services.
The second method puts all major accounts into two simple categories:
- Accounts with services engagement
- Accounts with no services engagement
The graph is then drawn showing the revenue stability of accounts in these two categories:
So if major accounts move from a 90/10 mix (90% spend the same or more with you) to a 60/40 mix (only 60% of your major accounts spend the same or more with you), what is the total impact to company profits? There is a framework to help measure that dynamic that I will comment on in my next entry.
How important is account stability to the viability of your company this year? Based on the few companies that I have seen conduct this analysis, I would observe that increased engagement from professional services is reducing account revenue loss. Does increased services engagement stabilize account revenues at your company? I would argue the sooner you figure that out, the sooner you can make much more intelligent decisions regarding services headcount, services offerings, sales compensation, and a whole host of other things.