Archive for the ‘Services Operations’ Category

The Ongoing Debate: Calculating Utilization

April 3, 2013

The debate on calculating billable utilization continues. Here is the most recent comment posted on Service Visions:

Thomas:

When reading your article, i was – just like Craig – puzzled by the baseline definition: I still do not get the full reasoning behind applying the 2080 available time baseline across regions and the link with global benchmarking. It would seem more reasonable to measure real productivity of staff against their available time (as defined by local work schedules) as a measure of “efficient / billable use of their available time”. This measure can be compared across regions to define where to source “efficient” services. Could you please elaborate more on your reply of Dec 15, 2012?

There is some brutal yet simple math that is relevant to this discussion. Here is a hypothetical example:

I employ two technical consultants. They live in two different countries. I use them both on projects across the globe. I bill them out at the same global rate of $200 an hour. Currently, they both have the same exact billable utilization rate against AVAILABLE hours (as the recent commenter recommend should be used).

However, one of the consultants is billable 2000 hours a year and generates $400,000 for my business. The other consultant, due to local labor laws, has less availability. They are billable for 1800 hours a year and generate $360,000 for my business. The $40,000 differential in profit is not irrelevant to my business. If I have ten consultants producing at this lower profit level, I am now losing $400,000 in incremental revenue.  

Now this math does not take into consideration local labor margins. If the consultant that is only billable 1800 hours a year costs less than the consultant that is billable 2000 hours, the labor margin advantage may make the 1800 hour consultant more profitable for the company. However, it is my experience that the delivery consultants with the lowest amount of available billable hours typically are located in areas with the most expensive labor costs.

To have clear visibility to the true profitability of various labor pools across a global service organization, I recommend service organizations use a common denominator of 2080 when calculating billable utilization.   As the simple example demonstrates, $400,000 and $360,000 are not the same numbers. Even if the consultants are achieving the exact same billable utilization rate against available hours.

If you have a service business that is not global and does not share resources across countries, this debate is less relevant. However, having expensive, low availability delivery resources claim victory by touting a high utilization rate against a low denominator is a false positive if you are attempting to optimize your global delivery costs.

I am sure this will not be the end of the debate regarding “how to calculate utilization.” I hope this post does explain why I recommend using a common 2080 denominator across all geographies in a global service business.

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Death of 97-2

October 10, 2012

This post is dedicated to every Services manager that has cursed the following words “According to 97-2….”

Over the years, TSIA has published several papers on the topic of revenue recognition when services are associated with the sale of a technology product.  Ever since FASB published 97-2 (hyperlinl), Product companies have been forced to engage in unnatural behaviors related to bundling services with the sale of a product. Well, that craziness is finally winding out of the technology industry. There are new revenue recognition guidelines that are being rolled out in the technology industry. I have blogged about these pending changes before:

Call to Action for Service Organizations: BIG Changes in Revenue Recognition Rules

These new guidelines are now becoming real for both hardware and software companies. You no longer have to simply take my word for it. These new guidelines are influencing the largest SaaS company in tech: salesforce.com. Below are notes from salesforce’s most recent 10-K. From my vantage point, these notes clearly spell out the death of a terrible practice titled “ratable PS.” Read the notes and tell me if you don’t agree.

In determining whether professional services can be accounted for separately from subscription and support revenues, we consider a number of factors, which are described in “Critical Accounting Policies and Estimates – Revenue Recognition” below. Prior to February 1, 2011, the deliverables in multiple-deliverable arrangements were accounted for separately if the delivered items had standalone value and there was objective and reliable evidence of fair value for the undelivered items. If the deliverables in a multiple-deliverable arrangement could not be accounted for separately, the total arrangement fee was recognized ratably as a single unit of accounting over the contracted term of the subscription agreement. A significant portion of our multiple-deliverable arrangements were accounted for as a single unit of accounting because we did not have objective and reliable evidence of fair value for certain of our deliverables. Additionally, in these situations, we deferred the direct costs of a related professional service arrangement and amortized those costs over the same period as the professional services revenue was recognized.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-13, “Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”) which amended the previous multiple-deliverable arrangements accounting guidance. Pursuant to the new guidance, objective and reliable evidence of fair value of the deliverables to be delivered is no longer required in order to account for deliverables in a multiple-deliverable arrangement separately. Instead, arrangement consideration is allocated to deliverables based on their relative selling price. In the first quarter of fiscal 2012, we adopted this new accounting guidance on a prospective basis. We applied the new accounting guidance to those multiple-deliverable arrangements entered into or materially modified on or after February 1, 2011 which is the beginning of our fiscal year.

Four Models for Recognizing Travel Expenses

March 11, 2012

My discussions with TSIA members on the topic of recognizing travel expenses has continued over the past week. And the discussions have revealed not one, but four potential models service organizations could potentially use to recognize travel expenses:

Now, based on the polling data from my previous entry on this topic it is clear that the most common practice is to pursue the first method.  This means the vast majority of service organizations simply invoice customers for the actual travel expenses incurred and recognize those expenses as zero margin revenue.

Also, we know from the polling data that very few PS organizations are marking up travel expenses before passing them onto the customer.

However, the other three methods do provide interesting mechanisms to prevent travel expenses from diluting the margin profile of the services business. So, please let me indulge in one final poll on this topic. Of the four methods itemized above, which method does your services organization pursue to recognize travel expenses?

The Downward Drag of Travel Expenses

February 28, 2012

The travel time and travel expenses associated with delivering service engagements seems like such a mundane topic. Yet, the nuances surrounding travel time never seem to cease.

Billing for Travel Time

Way back in October of 2008, I posted the following question on behalf of a TSIA member:

Do technology professional services organizations typically bill customers for the travel time incurred by delivery consultants related to the customer’s project?

The current polling results from that entry shows that roughly 65% of service organizations do indeed bill customers for various levels of travel time. So this is clearly the common industry practice.

VSOE and Travel Expenses

In November of 2008, another TSIA member was curious how service organizations were handling VSOE compliance when customers requested that travel expenses be covered in the daily rate of the resources. I posted the following polling question:

If customers request you include travel expenses in the daily rate, your service organization:

  • A. Includes those data points when calculating VSOE compliance.
  • B. Excludes those data points when calculating VSOE compliance.
  • C. Creates two VSOE rate schedules–one with travel expenses and one without.
  • D. Other

Here, there is no common industry practice. Currently, 50% of the respondents create two distinct VSOE rates (option C). However, 50% of respondents do something else.

Avoiding the Downward Drag of Travel Expenses

Now, for another question asked by a TSIA member on this topic of travel expenses:

Typically we are able to bill back approximately 90% of the Travel and Lodging incurred on client funded projects which is accounted for as revenue. However, there is no margin on this revenue. This zero margin revenue results in a 5%- 8% drag on our delivery margins. If we were able to take this as cost offset our operating margin would improve in a significant manner. We are keen to find an alternative approach to dealing with travel. Are any other service organizations handling travel expenses differently to avoid the negative margin implications?

I have to admit, I have never been asked this question before. Perhaps the accounting rules prevent any creative alternatives. But my interest has been peaked. The above inquiry actually spawns two questions:

  1. Is there a way to keep travel expenses from diluting margins?
  2. Are service organizations marking up travel expenses?

If a service organization is making margin on travel expenses that is not dilutive, they may want to keep the travel expenses on the service books! So, here are two quick polls. Take a moment and let me know what you are doing. If you have an interesting insight on this topic, please feel free to comment below.

Last But Not Least

October 26, 2011

The last day of TSW! And still, we are cramming in great presentations.

Yesterday we saw a killer presentation by Guy Gauvin of Taleo. Guy showed how Taleo is already living and succeeding by the new rules of tech.

Today, Maria Martinez, the executive in charge of the “Customer’s for Life” organization within salesforce.com will be sharing the mission and tactics of her organization. Clearly, salesforce is already living and dying by the rules of Consumption Economics.

After the keynote, we have multiple breakouts scheduled. I will be hosting one that overviews our brand new PS ODP offering. TSIA members now have the ability to engage TSIA to audit and diagnose the maturity of over 200 processes related to executing a PS business. We launched the pilot for this program at the beginning of this year. The PS organizations from five TSIA members have participated, including , HP Software Services, Schlumberger, Ericsson, Microsoft, and EMC.

In my breakout today, I will overview how the PS ODP works and discuss some of the processes we evaluate during audits. For any PS organization looking for a mechanism to improve performance or align global processes, I recommend you stop in for the overview.

Thanks to the TSIA team and the TSIA members for another outstanding industry conference.

And have fun launching those trojan horses…

Service Country Profiles: China

October 25, 2011

Yesterday, I spoke of the need for service organizations to drive tactics that will allow their companies to sustain current margin profiles.  You can see the presentation by visiting: http://www.technologyservicesworld.com/consumption-economics.html

Today, I deliver a breakout session on a tactic that has helped high tech companies extend their current business models: serving emerging markets.

Since Las Vegas last year, TSIA has been telling member companies that “exciting” growth for technology products will not be coming from North America or Western European markets but new major markets such as Brazil, China and India. These markets represent wonderful growth opportunities for product sales. That is the good news. The bad news: How do service organizations successful sell and deliver their services in these new major markets?

Over the past six months, TSIA has been interviewing service leaders to discuss the specific challenges of selling and delivering services in Brazil, China, and India. These interviews resulted in a framework we call “Country Service Profiles.”  A graph from that framework is below.

Today, I will present this framework in my breakout session and we will spend time discussing the specific challenges of selling and delivering services in China. Again, service organizations must be at the top of their game to defend their margin dollars. Accelerating success in tough service markets like China is yet another way to defend those service margins.

Tracking PS Profitability

August 23, 2011

Bo Dimuccio and the TSIA PS Advisory Board have been discussing the business model break points PS organizations actually use to track the profitability of the business. There are four major break points that a PS organization “could” be tracking to understand the health of the business:

  1. Project Margin: Track a margin contribution that is based on PS revenues – the direct costs associated to deliver projects.
  2. Delivery Margin: Track a margin contribution that is based on PS revenues  – the total cost of
    billable PS resources in the region. This calculation takes into account all of the unbilled activities incurred by billable resources within the region.
  3. Field Margin: Track a margin contribution that is based on PS revenues  –  (the total cost of billable PS resources in the region and the cost of non-billable PS headcount in the region). This calculation is taking account for any non-billable operational expenses being incurred within a region.
  4. PS Operating Income: Our margin contribution is based on a true Net OI calculation that includes delivery costs,  non-billable costs within the region and non-billable global operating expenses directly related to the PS business.

So here is the question of the day. What break points does your embedded Professional Services organization track?

 

Project Management Methodology: Market Share

July 7, 2011

This summer, I have been working on inventorying over 100 service processes related to managing a professional services business. This effort is part of the organizational development program we are piloting for professional service organizations. This program is modeled after the very
successful support services certification program TSIA has been offering for over five years.

While working on the criteria, there was a discussion regarding “project management methodologies.” Everyone agrees that project
based service organizations should adhere to some type of formal projectmethodology. The methodology should provide a framework for what project team members should be doing throughout the lifecycle of the project. Project management
methodologies provide guidance in the following areas:

  1.  Project Initiation
  2.  Project Planning and Solution Design
  3.  Project Delivery
  4.  Monitoring and Controlling
  5.  Project Closing

The question is “what” project methodologies are most popular in technology professional service organizations? There are at least
three off the shelf project methodologies I have seen PS organizations adopt:

And of course, many PS organizations create their own custom project management methodologies. I am curious what project management methodology your organization leverages:

Optimizing Service Partnerships: A Shift in the Success Metrics?

August 17, 2010

As I wrote in my previous entry, I spent a day at a “Partner Summit.” In this session, a group of TSIA members shared current tactics and current challenges related to working with partners to help deliver support services to customers. The companies in the room represented over $180 billion dollars in tech revenues—so their observations are clearly relevant to the state of partner management in tech.

These product companies have spent the past several years perfecting the process of selecting, enabling, and managing partners to deliver various support services.  Historically, the support services function within product companies has been very focused on optimizing the balance between customer experience and cost of services delivery.   The four to ten key metrics product companies use to measure the success of support services could be rolled into one of these categories.

The Extremes to Avoid

Over the past several years, there are two extremes every product company strives to avoid regarding the delivery of support services:

  • Under Serve: In this scenario, delivery costs have been driven down. However, customers are not satisfied with the service experience. Product loyalty is negatively impacted. Several well known tech companies have made this mistake, been penalized in the press, and then quickly increased their investment in support services.

  • Over Deliver: In this scenario, customer experience is outstanding, but delivery costs are not in line with industry averages. Outstanding customer experience does not buy incremental product loyalty. When customer’s demand cost competitive products, this is a lose/lose scenario. The company cannot afford to be price competitive because support costs are too high, and the customer doe not really value the incremental service level being delivered for the higher price.

The Current Sweet Spot

So, product companies have been extremely focused on reducing the cost of delivery without taking the customer experience below target thresholds.  In essence, they are trying to optimize the needles in the following way:

Tactics product companies have successfully pursued to meet this objective have included:

  • Aggressive use of outsourcing partners
  • Revised contract structures with outsourcing partners
  • Leverage of multiple service channels (web, crowdsourcing, etc.)
  • Segmentation of customer base into differentiated service models

Emerging Sweet Spot

But are the historical metrics of customer experience and costs enough in today’s marketplace? What if the economics of the product company became more dependent on services revenues and margins? If this was the case, the support services function within product companies would be asked to maximize total revenue opportunity from existing customers. In essence, a new, overarching metric of success would be established for support service organizations: The growth of total account revenues.

For some product companies, this shift in focus has already become a reality. These companies are now applying new metrics like “cross selling” and up selling” to evaluate the effectiveness of the support services function. In fact, what are the metrics support organizations should be using to validate their services delivery strategy is maximizing the total revenue (product + services) that can be extracted from a customer account? This is the new question being posed to service leadership. And with its answer will come a shift in how support services are delivered, how partners are leveraged, and how services are viewed as a potential engine for top line revenue growth.

Working with Service Partners: Seven Shifts

August 4, 2010

This week, I’m participating in a summit in the heart of Silicon Valley. The topic: The role of partners in delivering support services.  Participating companies (a group of hardware, software, enterprise, and consumer tech companies) are all experiencing the same trends regarding the role partners in delivering service offerings:

Historically, the technology industry has leveraged outsourcing partners to deliver support services for several reasons:

  • Reduce the total cost of delivering support services
  • Increase scalability of support resources
  • Increase global reach

In the historical model, the low cost provider was often the preferred provider. This has driven outsourcing providers to operate under very slim margin models.

Today, tech companies are finding the historical model no longer meets all of their business needs. Specifically:

  • The skills of agents from outsourcing partners are not meeting the demands and expectations of customers.
  • The traditional financial models are paying per headcount or transaction volume are not meeting the needs of either party.
  • The process of selecting, qualifying, and managing outsourcing partners may need to change.

With this back drop, these companies are meeting to discuss seven aspects of partner management that may be shifting:

From the discussions that have occurred before the summit, it is clear that three of these areas are top of mind for many tech companies:

  1. The financial models that are in place with service delivery partners.
  2. The partner selection process
  3. How partners are successfully enabled to deliver  increasingly complex service offerings

This one day session will not provide complete answers for all of these complex questions. However, the fact these service leaders are willing to spend the time together signals the tactics of successful partner management are shifting.  Beating service delivery partners into the ground on price may no longer be the predominate success tactic. In fact, this tactic may be accelerating the failure of some partner relationships! Partner enablement and joint financial reward may be the bell weather tactics of success moving forward.

I can’t wait for this session.