Bye Bye Cost Center: Refining the PS Charter

In my last entry, Defining the PS Charter, I discussed the process of setting the charter for an embedded PS organization and reported on the typical charter pursued by embedded PS organizations we benchmark. The data we have on PS charters shows that a majority of product companies have historically viewed PS as much more of a sales enabler as opposed to a stand-alone profit and loss center that drives revenue and margin.  As previously mentioned, this reality has led embedded PS organizations to sometimes sacrifice project profitability to achieve product adoption or account satisfaction. This leads me to make the following observations on the current trends impacting embedded PS organizations:

  • A majority of product companies have a long heritage of viewing PS as an enabler for product sales, not a source of service profits.
  • A vast majority of embedded PS organizations have no process in place to quantify the impact of service engagements on product sales
  • Shrinking product margins are placing increased pressure to improve PS margins

These three factors are combing to create a seismic shift in the charter of embedded PS. PS managers need to prepare for the ramifications of this shift.

Bo DiMuccio, our Sr. Director of Research at TPSA, has been analyzing the trends in PS charter. The figure below compares the shift in priorities we have seen occur in just the past year:

The Shifting PS Charter

The Shifting PS Charter

This data shows a significant decrease in having embedded PS focus solely on customer satisfaction and increased importance in having PS drive revenue and profits. These trends go hand in glove with the current economic environment and the role of PS in downturn . This trend does not mean product companies care less about customer satisfaction. They care immensely. It’s just that poor economic times combined with decreasing product and maintenance margins is forceing product companies to care much more about every margin dollar. Suddenly, PS management cannot hide poor financial performance behind the flag of “account satisfaction.” Especially since PS management cannot quantify the economic benefits of account satisfaction to the company.  So where does this leave us?

Navigating the Shift in Charter

There are three things PS organizations must do to prepare for a charter more focused on profitability:

1. Accurately track project costs: This sounds obvious, but I can tell you I just met last week in my travels with a services organization that cannot assign projects costs and accurately calculate project margins. There was never any sense of urgency since PS was used to drive product adoption in strategic accounts. PS is at the mercy of arbitrary budget cuts if PS management cannot track project revenues and costs.  

2.  Define the target PS business model: The second tactic is to define the target financial model the PS organization is aspiring to execute. This means defining target project margins, investment levels, and operating profit. TPSA has done extensive work in this area and the current business models being executed in the industry are well documented for our members. We also know that product executives that have not seen real industry data have very little sense of what a healthy, sustainable PS business model truly looks like!

3. Baseline current practices and results: Finally, the PS organization cannot move fast enough to baseline both business practices and business results against peer organizations. Do profitable embedded PS organizations require dedicated services sales resources or not? What billable utilization rate is achieved by profitable PS organizations? These are the types of questions a PS organization working to improve financial performance needs to understand.

In previous entries, I have emphasized the importance of PS capabilities to drive product adoption and account stability  . I still believe that the only economics that will ultimately matter to product companies will be the total growth and profitability of customer accounts—regardless of how they spend their money with the company. However, in the near term, PS organizations will be under immense pressure to improve their financial performance. Bye bye cost center. Bye bye “we only exist to enable product sales.” Hello profitable P&L.

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