Archive for the ‘Consumption Economics’ Category

How are tech companies tracking customer consumption?

November 24, 2014

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.

 

 

 

So you want to sell outcomes?

November 7, 2013

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.

Outcome Types

Blown Away by Analytics

July 6, 2013

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

Double Click on the SaaS Business Model

April 17, 2013

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.

Workday

 

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.

SaaS Theory

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.

SaaS Reality

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.

Unsustainable Competitive Advantage

March 6, 2013

This week, I read a scathing article on the demise of Michael Porter’s consulting firm:

What Killed Michael Porter’s Monitor Group? The One Force That Really Matters

If you are in management, you will find this article fascinating. If you are in the habit of using expensive “strategy” consultants, you will find this article both fascinating and discomforting.

Beyond its general insights, this article contains a timely message for technology companies. Michael Porter has argued for years that companies should identify “sustainable competitive advantages” that are hard to replicate. These advantages translate to higher company profits. As this article highlights, in reality, THERE ARE NO LONG TERM SUSTAINABLE COMPETIVE ADVANTAGES. Unless a company has an unfair advantage through government regulation or some other market anomaly, ALL CAPABILITIES can eventually be replicated.

The technology industry has enjoyed very high margins and profits over the past forty years. In mature industries, best in class companies can be expected to generate an operating income of  8% to 15%. In tech, companies are expected to generate operating incomes above 20%. Today, there are tech companies generating operating incomes well north of 30%.

Past success has made tech executives believe their high margin business models should be the perpetual norm.  I would argue these business models are a function of unsustainable competitive advantage.  These business models are a result of consumption models that require customers to make massive up front commitments to technology—and then make it very difficult for customers to change their mind if they are not satisfied with their decision. This approach to technology consumption is not sustainable. Business customers are rapidly exploring new “pay as you go” models designed to match value received with the price paid. In other words, the tech industry is gravitating to more normal market dynamics between buyer and seller.

Our last book, Consumption Economics, has become one of the top five sellers on Amazon in the category of high tech investment:

Amazon Best Sellers

This book defines how tech business models will need to rapidly change as the tech market matures. Many in the industry have read the book. Some readers believe the book is an accurate portrayal of how the tech industry will change. Some readers are convinced their high margin business models will not be changing anytime soon. For all past and future readers of the book, I would repeat these words:   THERE ARE NO LONG TERM SUSTAINABLE COMPETIVE ADVANTAGES.   The consumption models in tech are changing. Get ready.

Pricing Services: Changing the Game

January 15, 2013

Back in 2008, I posted a framework titled The Pricing Pentagon. The framework identifies the data streams required to enable effective service pricing. That has been one of my most popular posts to date. The framework, originally published in Mastering Professional Services, is becoming more relevant than ever.

TSIA believes technology service organizations will be forced to move off of their traditional cost based pricing models. This change is being accelerated by the trends in technology consumption. As outlined on our book Consumption Economics, we believe enterprises will continue to migrate to models where they pay for technology as they consume that technology. Historically, enterprises paid for all kinds of technical capability up front—some of which they never ended up needing or using. As enterprises subscribe to technology on an “as need basis”, they will begin rethinking how they spend money on the services that surround that technology.

Historically, there were two primary reasons enterprises paid product companies directly for services:

  1. Reduce the risk associated with implementing new technology (professional and education services).
  2. Receive insurance the technology will keep running (support and field services).

As we demonstrate in our Service 50 index every quarter, most product companies are very adept at making decent margins providing these types of services. We also know from our benchmarking data that most product companies employ variations of cost based pricing models to determine what to charge for their services. Cost based pricing, we believe, will become an unsustainable services pricing model for product companies. Why? TSIA has the following premises related to services pricing:

  • P1: Product companies will face immense pricing pressure on service offerings that are required to stand up and maintain a technology environment.
  • P2: These traditional service revenue streams will be declining.
  • P3: To offset decline in demand, service organizations will need to identify new service offerings (Business Impact Services)
  • P4: To offset pricing pressure, service organizations will need to revise service pricing models.
  • P5: To enable value based pricing models, companies need to be proficient at defining the business value customers receive from consuming an offering.
  • P6: Technology companies currently have weak (or non-existent) processes for defining and defending the business value customers realize by consuming specific services.
  • P7: As customers migrate to consumption based pricing models for technology, they will push for “value realization” pricing mechanisms for services.
  • P8: Customer analytics will become a key capability in understanding how customers derive business value from technology solutions.

If you believe even half of these premises, you will agree that traditional cost based pricing will be under pressure. Julia Stegman is our lead researcher on service pricing models. We are collaborating on documenting the data streams, organizational capabilities, and business processes service organizations will require as they migrate from “cost based” to “value realization based” pricing models. For more information on this body of work, contact thomas@tsia.com or julia.stegman@tsia.com

Eleven Things I Learned

November 9, 2012

On the last day of the recent TSW conference, I summarized the key insights I was taking away from my converesations with attendees over the three days. To watch this presentation, visit:

http://vimeo.com/52654677

Below are the insights I cover in the video.

1. Managed Services

  • Growing, profitable, but don’t call it Managed Services.
  • Limit liability? Org structure? Rev Rec? Comp Models? Financial Model?

 

2. Margin Box

  • Fixation on achieving certain margin targets for embedded service business lines. This means we walk away from customer opportunities because they don’t meet a specific target. We could be boxing ourselves in.
  • What matters: Total margin dollars (rev * margin) not margin %

3. Service Controlled R&D

  •  Service executive is given control of 5% to 15% of the product R&D budget. Focus those resources on capabilities that help customers realize value.

4. Solution Managers

  • Not product managers. Not service marketing managers. They are comped on the growth of both product and service revenues.

5. “On site is Insight”

  • Quote from Bill McDermott during his keynote. Why he believes service capabilities are so critical for product companies.

 

6. Success Science

  • You understand what makes your best customers your best customers.
  • Best customers = spend lots with you because they are being successful
  • Do you have a cohesive vision throughout the entire company concerning what makes your best customers your best customers?

7. Place Big Bets

  • Ex: Stand up a business consulting capability
  • Ex: Stand up a hosted version of your product for a customer
  • Ex: Aggressive reskilling program for services (technical to business)

8. Remove the Complexity of Services

  • For your customers
  • More importantly: for your sales force
  • Complexity look like: stove piped service capabilities, overlapping offers, death by a thousand packages

9. Starting up SaaS

  • 2 years to profitability
  • Amount you spend on sales and marketing impacts time to profitability
  • Design of the platform can dramatically impact time to profitability

 

10. Financial Model of Your Company

  1. Has to change
  2. Transition as quick as possible to the best model possible
  3. New model will not be throwing off 25 to 40 points of profit

11. Disenfranchising your team

  • Be savvy about orchestrating change
  • You have to bring the company along with you (R&D, Sales, Finance)
  • Don’t sacrifice your best people in this process

Records, Runways, and Tech

May 7, 2012

This week I am in Silicon Valley, hosting the Technology Services World conference. There are over seven hundred professionals representing 200+  technology companies at this gathering. In my opening keynote, I again warned that the business models of tech providers were on the verge of dramatic change. The new consumption based pricing models will surely force this change. And we can look to other industries to see how new consumption models disrupt legacy business models.

The Record Industry

The chart below was published by Bain consulting and it maps the revenues of record companies over the years.

When the CD was introduced, customers were given a killer advance in listening technology—and they responded by buying tons of albums. However, ever since music became available one song at a time, record company revenues have been declining. Yes, piracy is a challenge. But you have to recognize that record companies had legacy business models built on making, marketing, and selling albums. As a listener, it did not matter if you only liked two songs from that new group. You were forced to purchase the entire album. When songs were decoupled from albums and customers were given the ability to only purchase the songs they really wanted, the business model of record companies imploded. New consumption model. New business models required.

 

The Airline Industry

In the airline industry, low cost carriers have always been around, nipping at the heels of established legacy carriers. However, the rules of consumption changed for the airline industry with the advent of web sites like Expedia. Suddenly, consumers were able to see the price being offered by all carriers, side by side, to fly to a location. To compete in this model, legacy carriers like American Airlines were forced to strip out various services that were previously bundled in the cost of the ticket. In this way, American could at least stay competitive on these web sites when customers shopped for an air fare. The challenge is that American did not strip out enough cost. They still needed to charge for these services. The graph below shows how much American charges for add on services vs. low cost carrier Jet Blue. As you can see, American is charging much more for the same services.

If you look at the business model of American vs. Jet Blue, you see that American spends more money (as a percentage of revenue) on only one category: labor. Those higher labor costs drive American to charge higher rates for the same services.

Charging more for the same thing is never a winning strategy. The brutal lesson from the airline industry: Your higher labor costs are not the customer’s problem.

When Consumption Models Change

The consumption models in the technology industry are changing at a high rate of speed. In my opening keynote, I referenced the dramatic pricing move made by Adobe. Adobe software that previously cost $2,600 per user is now available for $50 a month. At some point, the Adobe management team realized they had no choice but to adopt their business model to align with the new consumption models in technology. At some point, every technology company will need to cross that same bridge. Cross that bridge, or follow the record companies and airline companies that did not truly change their business models when customers changed their pattern of consumption.

Why Partner Enablement is Broken

February 12, 2012

This past week eChannelLine announced the arrival of an annual study titled “State of Partnering.” The study is conducted by PartnerPath, a boutique consulting firm that focuses on partner strategy and channel enablement.

The eChannelLine article highlighted several key observations from the annual study. What caught my attention were the responses from the product vendors (or OEMs). Product vendors had the following rankings for what they want from their service delivery partners:

  • First and foremost: “Doing effective pre-sales discovery”
  • Next most important: “Selling value to LOB decision makers”
  • Other important capabilities: “Selling and marketing an annuity-based service” and “Developing a vertical solution”
  • Dead Last:  “Enhancing post-sales professional services delivery”

Beth Vanni, a Vice President at PartnerPath, provided the following observation to eChannelLine: “Only 30% of vendors plan to offer professional services training with partners.”

So it appears that vendors (or OEMs) are looking for service partners that can pull through products. How the partners actually implement and support the products are of little concern to the OEM. Sure, the OEM will provide the partner with technical training on the product. But training on delivering services—well, the partner can figure that part out on their own.

When OEMs made their money on large upfront product transactions, this focus on product pull through made sense. However, this traditional approach to poor partner enablement is incredibly dated and running out of economic gas.  Moving forward, OEMs will obtain revenue from customers actually consuming product features and capabilities. To make sure customers can consume, partners will need to be adept at enabling customers. To enable customers, OEMs will need to invest in enabling partners to deliver effective services.

The success models for the OEM/Service Partner relationship is changing—right before our eyes. For more thoughts on this topic of the OEM/Service Partner handshake, refer to my previous blog entries:

Understanding Partner Needs

Who REALLY Owns Partner Success?

Managing the Mix: Changing the Partner Management Dialogue

The Common and the Missing in Partner Enablement Practices

S50 Webcast

January 24, 2012

This Thursday I deliver the quarterly snapshot on the TSIA Service 50.

How are revenues, margins, and profits trending for the technology companies? Join me to find out.

Interesting trend in this snapshot: Product margins improved for IBM and Dell. I will drill into this and other ciritcal datapoints as we explore the performance of high tech business models.

Register for the S50 Webcast