Service Margin Trends

In Berlin next week, I will be delivering a keynote at the Technology Services Europe conference. In this keynote, I will be teasing out the patterns that are emerging in the world of technology services. But as part of that discussion, it is important that we all understand the patterns that have already clearly established themselves in technology services. One of those known patterns, is the steady increase of service margins. 

Product margins are flat or decreasing for hardware companies manufacturing everything from storage to servers. Even the Cisco has been unable to improve product margins over the past four years (see image below).

If service margins were following the same trajectory of product margins, technology industry executives would indeed have reason to gnash their teeth. Especially with more revenue now coming from services. Fortunately, that has not been the pattern over the past five years.

Over the past five years, technology service margins have been improving. Every quarter, TSIA reviews the performance of 50 of the largest providers of technology services. In 2005, these companies averaged a 42% gross margin on their services. By Q4 of 2010, that was up 10 points to 52%. The steady increase in service margins is shown in the image below.

I can tell you, if Cisco or Dell would have increased margins on their hardware by ten points over the past five years, it would have been front page news in the business press. Yet, that is EXACTLY what we did in this human capital intensive world of technology services. The challenge moving forward for service leaders is how to continue this success. Over the past five years, service organizations have pulled heavily on levers such as global labor arbitrage, reduced G&A, and disciplined reductions in discounting. Will these levers continue to create such dramatic increases in service margins? Unlikely. And that, my service friends, is a great topic to discuss at an industry conference. Look forward to seeing folks in Berlin.

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