Archive for the ‘Economic Impact of Services’ Category

B4B has Begun

September 13, 2013

Sorry I have been so silent lately on this blog. I have been heads down collaborating on a new book titled B4B. The historical business models of technology providers are imploding in front of our eyes–and this is why we needed to write this book. What do the new business models look like for traditional hardware and software companies?

B4B hits the streets next month at our Technology Services World conference in Vegas.

If you are interested in reading the first chapter, visit: http://www.tsia.com/members.html

Meanwhile, the real world examples of how the concepts outlined in B4B just keep popping. Cisco has always had an economic engine centered on product revenues and margins. As we discuss in B4B, that economic engine is commoditizing. Companies like Cisco will need to transition their economic engines. And the transitions have begun:

The move reflects two stated priorities of Cisco CEO John Chambers: to bolster Cisco’s overall security business and to rapidly expand Cisco Services operation in an effort to become the world’s largest IT company. In other words, Chambers wants to transform Cisco into an IBM with networking roots.

from Cisco adds Security Practice

The problem, however, is that Cisco (or any other hardware company) doesn’t really want to become another IBM. Have you looked at IBM’s top line growth numbers lately? No, product companies like Cisco need to become something very different than what IBM is today. And that is why we wrote the book. Can’t wait for Vegas.

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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

PS Margin Myths

March 20, 2013

I read a blog entry today from a venture capitalist that made me wince:

One of the Biggest Mistakes Enterprise Startups Make

In the post, he is making the argument for why software startups need to invest in Professional Services. I am in line with the majority of his reasons. Until his last point:

And finally, the most obvious argument is an economic one.

It’s true that professional services have a lower margin (say 45-55% gross margin) than software (typically 85-95% gross margin) and professional services business are inherently less scalable.

So I’m not endorsing your building your entire company around professional services (although I think that’s a fine strategy for many non VC-backed companies) but rather not to avoid it.

Let’s say you can do $1 million in software sales in your first year of selling delivering $850,000 of gross margin. Let’s say you can supplement that with $1 million in professional services revenue at $500,000 gross margin.

Need I point out that the $500,000 is still profitable revenue that can contribute to your central costs of running your business?

I have been involved in benchmarking embedded PS organizations for the past seven years. I know exactly what best in class financial performance looks like for PS organizations within software companies. I can tell you that both project margins and overall PS profitability have been steadily improving year over year. But I can also tell you, that on average, embedded PS organizations are not generating 50% gross margin on projects. And they surely are not dropping 50% of their revenues to the bottom line to cover other company expenses.

The logic in this blog entry is based on grossly inaccurate assumptions–and that is what makes it so dangerous. I pity the poor manager put in charge of PS for a company that this venture capitalist has invested in. The expectations of the economic role of PS will be based on napkin math, not financial realities.

Building and scaling a project based human capital intensive business is hard. Having investors that do not understand the financial realities of the PS business model make success almost impossible.

 

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

The Service Revenue Generation Dashboard

November 29, 2011

In previous blog posts, articles, and books, I have written extensively on the product to service mix of technology companies:

How Much Revenue from Services?

The bottom line: service revenues are critical to the economic health of product companies.

The Growing Annuity Revenue Stream

It is important to understand that the majority of the service revenues for product companies are annuity based revenues. In other words, the customer is signing an annual or multi-year agreement for services. These can be support services or managed services. For mature software companies, these annuity service revenues can easily represent 40% to 70% of total company revenues. Now, layer on the fact that some software and hardware revenues are migrating to subscription pricing models. These revenues are classified as service revenues and become another annuity revenue stream that must be managed. When the dust settles, product companies will find that the vast majority of their revenues will be represented by annuity based services. If this the direction revenues are heading, then product companies had better be VERY good at managing this type of revenue stream.

Service Revenue Generation

From the TSIA perspective, Service Revenue Generation (SRG) is the discipline of attaching, renewing, and up selling technology services. This discipline cuts across sales, marketing, and service delivery activities. To be excellent in this discipline is to be excellent at protecting and growing annuity based service revenues. The diagram below scopes the activities and revenue streams related to SRG:

Service Revenue Generation Dashboard

Now, how does a product company know if they are good at service revenue generation? This is the very question we asked Julia Stegman. Julia is a sales executive with extensive experience in protecting and growing annuity based service revenues. She has recently joined the TSIA team to lead our research efforts in the area of Service Revenue Generation.

Julia argues that product companies must excel at three key motions if they hope to protect and grow annuity service revenues:

  • Attaching service contracts to initial product sales
  • Renewing annuity based service contracts
  • Selling new service contracts that are not related to a recent product transaction

Below is a draft of the dashboard view of these three motions.

What specific practices should product companies have in place to move the needles on this dashboard? What metrics should companies be tracking related to these three motions? Julia has been working with an advisory board of industry executives to finalize the answers to these very questions. For more information on this new TSIA initiative, I recommend you contact Julia directly at julia.stegman@tsia.com. You can also follow her blog “Up and to the Right.”

All I can say, is that there is a lot of money on the table here. Annuity service revenue streams: that is where the growth game will be played for so many product companies.

The Very Predictable Dilemma of Cisco

May 17, 2011

Here we are in May of 2011. The business headlines read:

Back in February of this year, I posted an entry titled Cisco and the Services Chasm That entry referenced a previous entry I wrote in 2010 on Cisco titled Telecom and the Services Chasm

Both of these entries accurately predicted “the wall” Cisco would hit. This prediction was not prophetic– it was based on the realities of how the technology industry is changing and maturing.  Cisco’s challenges are not about the global economy. Cisco’s challenges are all about an economic engine that can no longer be supported by the changing enterprise IT market.

This is only the beginning…

How Much Revenue from Services?

April 19, 2011

To this date, one of the most common inquiries I receive from TSIA member companies is this:

How much revenue should a company like ours have coming from services?

How would you answer that question? Well, about four years ago, Geoffrey Moore and I set out to understand how product companies were answering that question. What we found is that very few product companies were explicitly answering the question, BUT product companies were consistently gravitating to very recognizable economic engines. The results of that analysis culminated in my third book, Bridging the Services Chasm. So, for the detailed to the above question, refer to the book. However, since this is such a common question, I decided to write a condensed response for my blog.

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Service Margin Trends

March 30, 2011

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. 

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Cisco and the Services Chasm

February 28, 2011

In August of 2010, I posted the following entry on this blog:

Telecom and the Services Chasm

The entry spoke of the maturation of the telecom industry and the impact that maturation has on technology providers like Nortel, Alcatel-Lucent, and Cisco. In that entry, I wrote:

The Telecom industry, and product companies serving that industry, find themselves smack in the middle of a “services chasm” market as described in “Bridging the Services Chasm.” In this type of market, traditional product revenues and margins have slowed as the market has matured. Product companies in the market must decide if they will change their revenue stream by diversifying into new service lines (we call that a change mix strategy), or stay focused on being a product provider and seek new product markets to pursue (we call that a change market strategy).

The Telecom industry, and this recent prediction of revenue trends, is a perfect example to help illustrate the dynamics that play out in maturing markets. Historically, telecom equipment providers such as Lucent, Alcatel, and Nortel, have all been very product-centric companies, with the vast majority of their revenues coming from actual product sales. However, the folks at Heavy Reading are predicting a dramatic shift in revenue mix for “leading” telecom providers from products to services.

When markets mature and companies enter the services chasm, there is one type of company that is at extreme risk of failing: The Product Provider. These are companies that receive a majority of their revenues from product transactions and have a small percentage of revenues coming from services. This imbalance makes it very difficult for them to adjust to the type of shift in revenue mix predicted for the telecom industry.

Today, I read an editoral by Bob Evans in InformationWeek. The title: Cisco Zapped by Destructive Power of Innovation. In the article, Mr. Evans reports the following insights on Cisco’s current challenges:

“Sales of Cisco’s largest switching platorm slowed at the end of 2010 as the product rapidly became uncompetitive from a price and functionality perspective.”

“Cisco did finally migrate customers to its not new product lines, but at much lower margin. Ouch!” 

Cisco, perhaps one of the strongest hard core “product providers” left in enterprise IT, is now facing the relentless march toward the services chasm.  Find a new hot product market with better product margins, or change mix and expand service capabilities. This is the challenging choice all product companies eventually face. Even companies as well managed and execution oriented as Cisco.

The Center of Technology Services

October 18, 2010

Today, we kick off the Technology Services World conference. When we launched the TSIA brand one year ago, our commitment was to create a community that would be at the center of the technology services universe. So let’s take a look at what is in store for the opening day of TSW.

TSW starts with a series of advisory board meetings. TSIA has established advisory boards for each of the unique service disciplines we research:

  • Field Services
  • Education Services
  • Professional Services
  • Support Services

These boards are composed of experts in each of these respective disciplines. These experts provide insights on the types of research and programs TSIA should pursue to help companies optimize these service lines. In addition, TSIA has an executive advisory board. This is a group of senior service executives that provide insights on the overall trends impacting the technology industry.

While the boards are meeting, TSIA partners are conducting professional development workshops. These workshops are focused on topics such as “value based selling” and “best practices in knowledge management.” Attendees are introduced to practical tactics they can take back to the office to improve service performance.

After the board meetings and professional development courses, we kick off the general session. I will deliver a keynote outlining tactics to drive services transformation within product companies. After me, TSIA member Compuserve and TSIA partner Neochange deliver a keynote that outlines how Compuserve has developed an entirely new services portfolio centered on the concept of end user adoption. This will be followed by a keynote from GE Healthcare that addresses the fastest growing segment in the TSIA community: Health care technology solution providers.

The general session rolls out into a reception anchored by companies providing leading edge services and solutions that help service organizations improve performance.

Finally, TSIA hosts a Chief Services Executive dinner. This year, the dinner was oversubscribed, with well over 130 service executives requesting to attend.

Once again, our commitment for TSIA was to create a community that would be at the center of the technology services universe. When I review the first day activities of TSW, when I think of all the companies represented, when I review the agenda of great speakers and topics, and when I think of the companies helping to sponsor this event, I absolutely feel we have met that commitment.