Archive for the ‘Uncategorized’ Category

The Case for Centralized Services

June 10, 2013

There is a debate that occasionally resurfaces within companies that have multiple business units:

Should Professional Services be distributed within each business unit or centralized to support all the business units?

There are three compelling arguments for distributing PS into each business unit:

  • The PS capability can be customized to meet the unique needs of each business unit
  • The GM of the business unit can have direct control of the resources required to implement the products of the business unit
  • PS experts will create tighter relationships with the R&D staff building the products

All three of these points have merit. However, the most recent data from TSIA organizational structure surveys shows that the vast majority of technology companies DO NOT distribute Professional Services into each business unit. Instead, they create a global PS capability that supports the needs of all the business units. Why is this the predominate model? There are four critical economies of scale that drive this decision:

  1. Reduction of management overhead: By creating one PS organization, there is an opportunity to minimize the amount of non-billable management headcount required to support PS activities.
  2. Reduction of duplicate processes: Having multiple business units spinning up PS processes is less than optimal.
  3. Opportunity to cross-pollinate: By having one PS organization supporting multiple products, there are opportunities to share best practices in design and implementation across technologies.
  4. Critical mass of delivery resources: Finally, most importantly, the PS business is a lumpy project based business. The more projects in play, the more opportunity to smooth out resourcing requirements across those projects. Smaller PS organizations embedded in business units often struggle to reach a critical mass of headcount to sustain profitability.

In addition to the economies of scale, there are other reasons to not embed PS into product oriented business units:

  • Free projects: Business units focused on making product often have a tendency to give services away in order to secure product deals. This approach quickly makes PS an expensive cost of sales capability.
  • Lack of service processes: Product oriented business units often have little experience or little interest in maturing the processes required to deliver profitable services. Service pricing, risk assessment, project management, scope management, skills development, and resource planning are but a few of the processes critical to service success but foreign to product business units.
  • Cannibalization of delivery resources: Finally, PS organizations that are integrated into business units often find themselves on the short end of the headcount conversation. Product Engineering, Product Marketing, and Product Sales all receive a higher priority when it comes to resource allocation. This can leave the PS team struggling to build critical mass.

Several years ago I had the opportunity to interview John Swainson when he was the CEO of CA. At the time, some of the CA management team was debating the optimal organizational configuration for Professional Services. Mr. Swainson has a long tenure in tech, including 26 years at IBM. During our conversation, I recall he made some astute observations:

I have seen PS organized three ways: decentralized with R&D into business units, centralized but reporting to sales, centralized and separate from sales. The last model is the only one I have ever seen where PS doesn’t become a cost burden to the company. Sales has a tendency to give services away. R&D doesn’t really want to manage a services P&L.

Words of wisdom from a seasoned tech exec. Having a separate PS organization can create tension with both sales and product leaders. However, it is a healthy and required tension that serves the company well. If an independent PS organization is not aggressively managing project costs and risks, who is?

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Acme Packet and Dell: Two Sides of the Same Coin

February 5, 2013

There were two events that happened this week in the technology industry that speaks volumes to how the financial models in the industry will be shifting dramatically over the next few years.

First of all, Oracle made a surprise acquisition of Acme Packet. Acme Packet is a classic hardware company selling to telecom carriers. Acme currently makes almost 80% of their revenue on selling high margin hardware. They wrap high margin support services around that around to generate a 80% gross margin business. Beautiful. Isn’t this the business model that any hardware company would envy?

Acme

The problem is that Acme’s is spending over 34% of their revenues on sales and marketing. The industry that they are in is hyper competitive. The stock has been going nowhere. The future prospects of Acme Packet as an independent hardware company banking on high margin product sales to drive growth and profits seems to be limited. Oracle is looking to broaden into the world of networking and they saw a unique opportunity to buy their way in. If Acme saw a future of high growth and high profits as an independent company pushing hardware, they would not have sold.

Next, news broke that Dell plans to go private. Last year, Dell made 80% of its revenue from selling products. Their revenue mix looks very similar to Acme Packets. However, Dell products are becoming more and more commoditized. Gross margin on products is running around 20% for Dell. This is my intuition, but I believe Michael Dell is clear that the future of a company making the vast majority of revenue selling hardware is challenged at best. Dell must reengineer the economic gears. And this will be painful. Better to go through this pain as a private company.

Dell

Acme Packet selling to Oracle and Dell going private are really two sides of the same coin. An economic engine based on the vast majority of revenues coming from hardware is under very real duress. Companies in this model need to make bold moves to move off of this model.

This is only the beginning. The historical tech business models are about to be turned upside down. The Dell and the Acme Packet business models were forged in the tech industry over twenty years ago. Personally, I believe product intensive business models are no longer the path to growth and profits. Keep watching the news—this is not the end of interesting headlines.

Job Posting: Research Analyst

December 19, 2012

This is my last post for the year. As we roll into 2013, I am looking to hire a Research Analyst to support the TSIA research team.  Below is an excerpt from the job description. The person will be working with all of the TSIA research leaders (TSIA Leadership Team).If you are interested in working with this dynamic team of individuals that are laser focused on the world of technology services, contact me directly at thomas@tsia.com.

The primary function of the Research Analyst role is to support the research analysis of the research staff at TSIA. The Research Analyst will work with research leads to provide analysis and insight to TSIA members based on TSIA datasets and frameworks. The Analyst will also help research leads conduct industry studies. Over time, the Analyst will become a leading expert in both the data TSIA aggregates on the Technology Services industry and the key trends that are presenting themselves in these data sets.  

Responsibilities

 Be the primary research support for TSIA service discipline research leads:

  • Assist with development and deployment of surveys
  • Assist with data analysis and research in support of service discipline research projects
  • Assist with development of member benchmark assessments and other member deliverables
  • Provide research assistance in support of service discipline writing/publication

Be the Benchmark/survey analytics guru

  • Establish credentials as the in-house expert/power user of TSIA data sets.
  • Provide pre-defined analyses.
  • Respond to ad hoc requests for inquiry.

 

Qualifications

  • B.S./B.A. in information systems, business, or data/analytics intensive social science discipline, such as psychology or economics
  • Knowledge of off-the-shelf DB or analytical tools, such as Access DB or SPSS
  • Experience in survey design and advanced data analysis
  • Minimum of 2 years of industry experience, preferably in the technology industry;  technology or technology services experience is a plus
  • Strong customer service/customer relations skills.  Have the ability to develop strong rapport and instant credibility.  Ability to represent the association enthusiastically and effectively.
  • Good verbal communication and written skills
  • Strong (intermediate to advanced) computer skills, including MS Office Suite (Word, Excel, PowerPoint and Outlook), are a must.
  • Must be a strong team player, motivated by both individual and team achievement

 

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!

So what is “Premium Support” in the world of cloud computing?

June 25, 2012

Amazon.com has become a substantial player in the world of cloud computing. Amazon (yes, the online book seller) provides cloud offerings to host web services, storage, and computing cycles for companies of all sizes.

Recently, Amazon announced new pricing related to their support services:

When you read the article, it sure feels like a race to the bottom for what cloud computing companies plan to charge for support services. However, the technology industry currently has a model where significant revenues are achieved by providing value added support services to customers. In the TSIA Service 50 data, we know that enterprise software companies, on average, receive over 60% of their revenues from services. Hardware companies receive over 30% of their revenue from services. If cloud computing companies are going to give “premium” service away for free, will these service revenues simply evaporate in the world of cloud computing?

What Amazon Does Offer

Before we say goodbye to all those lovely service revenues, we need to pause. Julia Stegman is TSIA’s VP of Research in the area of Service Revenue Generation. She lives and dies around the best practices for attaching and renewing service contracts to product customers. And she is convinced, more than ever, that attaching value added services will continue to be the lifeblood of economic health for technology companies.

After reading Amazon’s announcement, Julia tried to contact Amazon by phone to ask questions about their new support service offerings.  She summarized the following experience:

  • There’s no phone number on their website
  • You have to enter an account number to receive the phone number
  • Even a “sales question” doesn’t have a phone number — you fill out a web form and it gets routed to someone

Frustrated with the lack of response, she read the information provided by Amazon on their web site regarding their premium support offering deliverables: http://aws.amazon.com/premiumsupport/

After reading the document, she sent me the following summary observations:

The Basic Level Support

  • Customer service/billing questions   (that’s a cost of doing business)
  • Support forums     (power users do the work + 1:Many creates scale)
  • White papers, best practice guides    (1:Many creates scale)
  • Access to Technical Support appears very limited.
  • Seems you are invited to place a case JUST to resolve an error message through their proactive monitoring capabilities.

Support for Health Checks  

  • Health Checks monitors the health and status of AWS Services and the status of these checks are displayed within the AWS Management Console.
  • When a check does not pass, customers will be given the option to open a high priority ticket with Technical Support for assistance.”

Developer Level

  • Email only and local business hours with 12 hr response time   (industry average is 4 hours)

Business Level

  • Where the deliverables start looking like traditional tech companies with access to Technical Spt via phone, chat & email 24X7.
  • 1-hr response.

Best Practice Guidance

  • Offered via white papers at the Basic Level and via the Technical Spt team on the “pay for” service levels.

Premium is not Premium

At the beginning of this year, TSIA began benchmarking the service revenue generation practices of technology companies. Part of this benchmarking includes data related to what hardware and software companies provide in level 1 (basic) and level 2 fee based support contracts. The graphs below from Julia compare industry averages to the Amazon offerings.

As you can clearly see, Amazon “free support” and “premium support” look nothing like the basic and premium support offerings of enterprise class technology companies. This is truly an apples and oranges comparison. Enterprise class technology companies are providing a host of capabilities that Amazon is clearly not putting on the table.

Perception Becomes Reality

Even though the support offerings of cloud based providers like Amazon do not look anything like support offerings of enterprise technology providers, TSIA is cautioning all of its members to track these industry comparisons. As more customers move IT infrastructure to the cloud, their service expectations are being reset by the Amazon’s of the world. And what service capabilities they value are being reset. Enterprise technology companies will need to be expert at defining and defending the value proposition of their services. That is, if they want to maintain those services based revenue streams!

A Platform for Recognizing Service Innovation

May 18, 2012

The technology industry is enamored with technology innovation—as it should be. Technology innovation creates “oohs and aahs” from customers and analysts. But in the technology industry, the fastest growing revenue lines are service related. And recognizing service innovation is not top of mind in the technology industry. Even though millions of dollars of profit are at stake in the service businesses that are embedded in product technology companies. From TSIA’s perspective, this needs to change.

Two years ago, TSIA launched “Service Revolutions.” This is a competition where companies have six minutes to pitch how they are revolutionizing the way services are delivered. The audience (composed of industry professionals) votes on what concepts they think are truly most revolutionary. TSIA recruits startups that are working to revolutionize the world of technology services. The winning startup receives a $10,000 check and a wonderful PR opportunity. We also recruit existing service practitioners to pitch how they are changing the service game. This year heavy hitters HP and SAP pitched interesting service innovations. The audience picked SAP’s innovations in delivering implementation services:

The Advanced Delivery Management builds on the concept of Rapid Deployment Solutions as fully packaged solutions that can be delivered in short time and extends this concept to services SAP delivers. The key components that allow us deliver consistently around the globe and deliver predictable results is standardization of the way we deliver both on organizational level and in the way we design the services portfolio.

I love this body of work by SAP. They have been on a multi-year journey to reduce the amount effort required to implement SAP software, and their investments are paying off. Even more, I love how SAP is shining a bright light on how service innovation is changing the game for them. Check out this post on their community page: ASAP Methodology

There is a lot of money at stake in these service businesses. And where there is revenue, there is usually investment for innovation.  I can’t wait for next year’s “Service Revolutions.”

Technology Service Trends: 2012

December 14, 2011

It is that time of year again, when the TSIA research team huddles, discusses, debates, and then documents our research agenda for the upcoming year.  This past year, TSIA published the book Consumption Economics: The New Rules of Tech. This book was written to clearly document how traditional technology markets are changing. The book identifies several key trends that are forcing companies to alter their service strategies. These are the same trends that are heavily influencing the agenda of the TSIA research team:

  • Cloud Computing: This is the ongoing trend of hardware and software capabilities migrating from local locations to centralized locations. These centralized, “clouds” can easily be accessed from anywhere. This migration began over a decade ago with software as a service models (Saas), but has continued to expand to now include infrastructure as a service (Iaas) offerings like Amazon.com’s storage offerings and platform as a service (Paas) offerings like salesforce.com’s  AppExchange.
  • Consumption Based Pricing Models: This is the trend where customers pay only for the technology they are consuming, instead of investing in capacity that they will grow into. This pricing model is presenting itself in everything from storage, services, software features, and even processor features that can be turned on well after the initial purchase. This new pricing model changes the revenue streams for technology providers.
  • Consumption Analytics: In the world of consumption economics, technology companies must understand what product capabilities customers are actually consuming (or not consuming). This responsibility is also falling to the services organization. How can technology companies better track actual customer usage behaviors? What new revenue generating offers can service organizations create based on this data?
  • New Go to Market Models: Historically, product companies have leveraged a go to market model that leads with product functionality and leans on partner capabilities. In a post cloud/utility landscape, “product features” will weigh much less than “service features” in the decision process of customers. This means product providers will have to transform their selling motion to truly be services led. For a majority of product companies, this is not a minor transition. 
  • Mobility Computing: Mobility computing is where the access to IT capabilities no longer occurs through traditional desktop machines that are loaded with processing power, memory, storage, and are tethered to the corporate network. Instead, users expect to access IT capabilities from any location and from a myriad of devices, large and small. TSIA partner PWC has observed that companies need to migrate from “email cultures” to “app cultures.”  If you stop to think about that simple concept, the ramifications are immense.  The explosion of smart mobile devices and “apps” is forcing technology solution providers to rethink everything from solution design to security to price points for solutions.
  • Social Media: This is the phenomenon of communities leveraging technology platforms to share experiences and insights. For technology providers, social media is not about high school friends reconnecting on Facebook. Social media is connecting customer communities in ways that technology providers cannot control. This trend is forcing tech companies to rethink strategies related to user communities, support models, and knowledge bases.
  • Rise of New Major Markets: Finally, it is very clear that as the world emerges from the most recent global recession, some of the greatest economic opportunities will not be represented by the traditional tech stronghold markets of North America and Europe.  China, India, and Brazil are but three examples where overall economic growth is expected to far outpace that of the U.S. and Europe. Historically, technology companies have taken products and services optimized for North America, and migrated those offerings to other markets. To maximize growth opportunities, tech providers will need to launch their new products and services with the new major markets in mind—from the beginning.

A majority of these shifts in market dynamics are not new from last year. However, they are requiring tech companies to revisit how they will we pursue target markets. How does a tech company go to market with cloud applications? What is the role of partners if customers now purchase subscriptions from product companies directly? And what does the business model for a product company look like when customers are not willing to spend significant amounts of upfront cash on licenses and maintenance contracts?

The TSIA research team has vetted these trends with the Advisory Boards for each service line TSIA supports. But I am very curious how you see these trends influencing your service business in 2012. Which one of these trends will have the GREATEST impact on your service business next year? Take a second and vote below. I’ll publish the results right after the holidays.

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 SaaS Business Model

September 18, 2011

In the recent Cloud 20 webcast I hosted, we discussed the topic of the financial business model that SaaS providers will mature into. Right now, we know that SaaS providers that are public do not have business models that are as attractive as the business models of successful license based software companies. In the TSIA Service 50 index, we track the public data of many of the leading established license based software companies. In the graph below, we compare the business models of SaaS companies in the Cloud 20 to the average of business models of software companies in The Service 50:

I have made the above observation in multiple forums over the past two years. There is nothing quite as special as the profitability of a mature license based software company. And to date, SaaS companies have not proven they can be anywhere near that special. But let’s move the conversation one step forward.

The Target SaaS Business Model

Right now, everyone I speak to regarding the SaaS business model believes it is still maturing. “Hey, most of these SaaS providers are in high growth mode as they grab market share. The mature business model will emerge after the land grabs.” OK, I can buy into that assertion. So as SaaS becomes a more and more popular mode for consuming software, how will these SaaS business models mature? We know that a “healthy” enterprise software company generates gross margins north of 80%, spends less than 40% on Sales, Marketing, and G&A, 15% on R&D, and generates a profit north of 20%. What will a “healthy” SaaS business mode look like? The image below shows the actual business models of some of the SaaS companies we track in the Cloud 20 and places them next to a hypothetical target business model for successful, mature SaaS companies.

As the image shows, even large SaaS provides like salesforce have a long way to go before they approach a business model that looks even remotely interesting from a profitability perspective.

The Levers of the SaaS Business Model

In our recent webcast on The Cloud 20, I asked the attendees where the greatest opportunity lies for SaaS providers to improve the performance of their business models. Will they be able to reduce the
percentage they spend on R&D? Will sales and marketing expenses trend smaller as brands become larger? Or perhaps G&A will reduce as a percentage of revenues as these companies grow. The audience was very clear in their response. They believe the greatest opportunity for SaaS providers to improve the SaaS business model is to improve the margin on subscriptions. That makes good sense. Except, a majority of the audience also believed that average subscription prices for SaaS offerings will trend lower, not higher, over time. This means the entire SaaS business model hinges on the volume of incremental subscribers outpacing both the price pressures on subscriptions and the cost to serve more and more diverse customer needs. This may indeed be the scenario that plays out for SaaS. However, that is not how it has played out in other IT markets. Think PCs. As the capability and complexity of each unit went higher, the cost per unit went lower and lower. The result has been a very low margin low profit business model for the PC manufactures, regardless of the market share they command.

What is the target business model for SaaS providers? Based on the rapid adoption of cloud based software models, we will find out shortly enough. I’m just not sure those of us in the IT industry are going to like the answer.

TSIA Cloud 20 Webcast: The Financial Model of Cloud Providers

September 5, 2011

Over the past three months, the TSIA team has been heads down putting the final strokes on our latest book: Consumption Economics: The New Rules of Tech. This book reveals the fundamental impact cloud consumption models will have on technology providers. One aspect of that impact will be the shape of their financial models. How much margin will hardware and software companies make as cloud computing grows? How much will these companies need to spend on markteting their services?

Join me this Thursday as I review twenty cloud computing providers and analyze the financial models of the future:

http://webcasts.tsia.com/home/listing/tabid/64/listingkey/139/the_tsia_cloud_20.aspx