Archive for the ‘Service Strategy’ Category

Digging Economic Moats

November 8, 2014

Dear Reader:

So sorry it has been so long since I have posted on this blog. At TSIA, we have been very busy helping our members navigate through the current industry transformation related to technology business models.

If you missed us at our most recent conference in Vegas last month, I am posting a link to my keynote.
https://www.youtube.com/watch?v=92q360ckbsk&feature=youtu.be

In this presentation, I ask and answer the following four questions:

1. What are the attributes of highly profitable revenue?
2. Why are technology companies facing a potentially dramatic decrease in profitability?
3. Why are emerging technology as a service companies not generating profitable revenue?
4. What can be done to make technology as a service a profitable business model?

For TSIA members, this a paper that supports this presentation:

http://www.tsia.com/documents/Digging_Economic_Moats_for_XaaS_Business_Models/

Enjoy!

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.

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.

 

Industrialized Services

February 25, 2013

There is a concerted effort in the technology industry to provide professional service offerings that are fixed cost, low risk, and high value. These offers are sometimes called “packages”, “productized solutions”, or “industrialized services.” Regardless of the title, these types of service offerings have the same key attributes:

  • They are well defined and highly engineered to reduce delivery risk
  • They leverage delivery tools and methodologies to reduce the amount of hours required to deliver
  • They are designed to be highly repeatable from customer to customer

As more PS organizations swing the pendulum of their services from “custom and labor intensive” to “engineered and optimized,” TSIA is hearing a common service business challenge: What are the organizational capabilities required to successfully build and deploy industrialized service offerings?

Build it and They May Not Come

The concept of codifying PS expertise into delivery methodologies and tools to reduce both risk and delivery effort is by no means new or revolutionary. However, the successful execution of this concept continues to elude most PS organizations.  Why? I would argue there are three key reasons:

  1. The service organizations define and develop service offerings based on their strengths—not their customer needs.
  2. Service organizations attempt to market these offerings on features and not business value.
  3. Even if the service organization has defined compelling offerings that could deliver business value to customers, the services organization fails in executing the services consistently on a global basis.

These failures occur because the service organization does not have the required organizational capabilities to truly execute industrialized services.

 

Organizational Capabilities Required to Execute Industrialized Services

Before a service organization jumps on the “engineered” or “industrialized” services party train, TSIA recommends the organization assess the effectiveness of the following organizational capabilities:

  1. Value Proposition: The ability to engineer service offerings that deliver valuable customer benefits and clear points of competitive differentiation.
  2. Value Based Pricing: The ability to set prices for fixed priced service offerings that are based on the value proposition of the solution.
  3. Solution Components: The understanding of what assets truly reduce engagement effort and risk.
  4. Service Development Life Cycle: A mature and effective service development life cycle for professional services offerings.
  5. IP Asset Reuse: The ability to maximize the reuse of all relevant existing services assets in service engagements.
  6. Field Enablement: The processes and programs to enable regional services staff to delivery target offerings.

These are not the only organizational capabilities required to drive the market success of industrialized offerings, but these are table stakes. If your company has poorly defined processes or weak skills in one of these categories, your ability to drive industrialized services will be hampered.

TSIA has observed that PS organizations that pursue industrialized offerings can quickly create datasheets describing the offerings. However, without the organizational capabilities described above firmly in place, the offerings never reach their theoretical potential.

Service Capabilities Heatmap

December 15, 2012

A new tradition.

TSIA defines organizational capabilities as “the ability to perform actions that achieve desired results.” TSIA maps the capabilities required by all service organizations into the following eight categories:

  1. Strategy and Planning
  2. Offer Development
  3. Sales and Marketing
  4. Talent Management
  5. Service Operations
  6. Partner Management
  7. Technology Infrastructure
  8. Performance Management

In each one of these categories, there are capabilities that a service organization must master to scale and optimize their business.

In the first ten months of 2012, TSIA received over seven hundred inquiries from member companies. Also, TSIA has been surveying member companies regarding the service capabilities they are most interested in improving. Mining that data, there are clear patterns regarding the service capabilities that member companies are
working to establish or refresh.

This month I published a Service Capabilities Heatmap.

These are the top ten service capabilities we sell TSIA members working to optimize as they enter 2013:

  1. Sales Coverage: We effectively align sales resources and channels with the market to cost-effectively sell our service offerings.
  2. Pricing Strategy: We actively manage pricing based on a strong understanding of demand, competitive factors, and business objectives.
  3. Customer Analytics: We have the data streams and expertise to monitor how customers are using our technology and then develop services that are proven to increase adoption of our technology.
  4. Proactive Channel Management: We effectively analyze the cost and quality of all customer interaction channels (phone, email, self-service, chat, online communities, social media) and then influence channel choice, moving customers toward more efficient and less expensive channels.
  5. Services Enablement (issue avoidance): Data and experiences from service engagements effectively influences product development priorities to reduce the cost of implementation and support efforts.
  6. Realtime Dashboards: We leverage enterprise class systems to provide realtime data on critical service performance metrics.
  7. Organizational Structure: We have implemented an effective services organizational structure that optimizes the parameters of service costs, service revenue growth, and customer experience.
  8. Asset Reuse: We maximize the reuse of all relevant existing services assets in new service engagements.
  9. Resource Optimization: Across geographic boundaries, we optimize the mix of resources to services delivery to ensure service success and margin performance.
  10. Managed Service Offering: We have multi-year, annuity based service offerings that help our customers operate and optimize our technology solutions.

For the complete report on 2013 Service Capabilities, send me an email at thomas@tsia.com and I will forward it on to you.

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

The TSIA Cloud 20: Growth vs. Profitability

September 18, 2012

This Thursday I will be hosting a webcast that analyzes the financial performance of 20 public cloud computing companies. Below is a graph of their quarterly revenue growth:

The quarterly revenue growth (year over year) for these twenty companies is averaging 24%. This comapres with flat top line revenue growth for the broader technology sector as shown ihn one of the guages on the Cloud 20 dashboard I will present in the webcast.

Do growth is great for cloud computing companies. But what about profitability? How are the financial busines models shaping up for this new breed of technology provider? Join me on Thursday to find out:

http://cysalesteam.com/tsia/event/the-tsia-and-pwc-cloud-20

Framing Managed Services

September 10, 2012

Every year TSIA benchmarks the growth rate of service revenues in over one hundred major technology companies. From this data, we know three things:

  • For some original equipment manufacturers (OEMs), Managed Services has already become a core source of revenue and profits.
  • For other OEMs, Managed Services become a new, hot services offering.
  • On average, Managed Services is the fastest growing service line for hardware and software companies that have established support and professional service businesses.

So Managed Services is becoming an ever more important component of the economic engine for OEMs. The real challenge is to truly understand what is actually in this fast growing service line.

I have spent the past three months speaking with TSIA members about their Managed Service businesses. It is clear the lines between Managed Services and SaaS have blurred.  CRN published an article titled Managed Vs. Cloud Services attempting to clearly define the difference between Managed Services and SaaS. I can tell you, the OEMs are not very concerned about following these definitions. In fact, many OEMs have Managed Service offerings that would comfortably fall into Gartner’s definition of SaaS.

To add to the confusion, the lines between Outsourcing and Managed Services have also blurred. Brainstorm states that the difference between Outsourcing and Managed Services is the length of contract. Sorry, OEMs are cutting very complex, multi-year deals that are being classified as “managed services.”

So, why does all this matter? Because at some point in time, CFO’s at OEMs will want to understand how their Managed Services business is performing. They will want to benchmark growth and profitability. But benchmark against what? If you own a Managed Services business, this question will become critical at some point in time.   To help address this dilemma, TSIA has published a new white paper:

Service Insight: Framing Managed Services

Enjoy!

The Service 50 Snapshot

July 31, 2012

The first quarter of this year was rather flat for the fifty technology companies TSIA tracks in the TSIA Service 50. This Thursday I will be reviewing how these companies performed in Q2. Did the bumpy ride continue? Tune in and see how your company performance compares to the broader industry. Also, hear TSIA’s perspective on the key trends that will be impacting the performance of technology solution providers throughout the remainder of the year.

Register for the TSIA Service 50 Webcast

 

 

Org Structure in Technology Services

July 13, 2012

Several years ago, TSIA conducted a survey on how the reporting lines for service organizations were stuctured within product companies. Below is one of the graphs from Service Insight I wrote after we analyzed the data.

To download the full report I wrote, TSIA-DV-07-007 Org Design.

This week, we launched a refresh of that survey.  If you are curious how service lines are typically structured in a technology company, take a  few minutes and complete the survey. I wil lbe analyzing the data early next month.

TSIA Organizational Structure Survey