Managed Services Momentum

April 8, 2013

At the end of 2012, TSIA brought on a new Senior Director of Research to lead our efforts in the area of Managed Services.

Since joining our team, George Humphrey has been working with TSIA members to establish a new operational benchmark for Managed Service organizations. Since Managed Services has become quite the hot topic within tech services, George has also been popular with the tech press.

To learn more about our new Managed Services benchmark, contact George directly: george.humphrey@tsia.com

To read George’s latest comments in the tech press, visit Diane Royer’s article titled

Managed Services is Sizzling Hot

http://www.telecomreseller.com/2013/04/08/managed-services-is-sizzling-hot/

 

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.

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.

 

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.

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.

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.

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

Managed Services Mistakes

January 8, 2013

In my last post related to Managed Services (Framing Managed Services), I made the following observation:

Managed Services is the fastest growing service line for hardware and software companies that have established support and professional service businesses.

At TSIA, we see this trend continuing in 2013. To support this critical service line, we have hired a veteran from the Managed Services industry to lead a new TSIA service discipline dedicated to Managed Services. George Humphrey joins us from Avaya where he helped build and optimize their Managed Services offerings.

This week, George was debriefing me on conversations he has had during his first thirty days with the advisory board members of this new discipline. Companies currently represented on the board include: Avaya, Cisco, EMC, JDA Software, Microsoft, IBM, Symantec, and Ricoh.

As George summarized the discussions, I was transported back in time. I felt like it was twelve years ago, when I first started working with multiple product companies regarding their Professional Services business. At that time, all of the PS leaders suffered from the same handicap—they could not benchmark the financial performance of their business against similar embedded organizations. Because no meaningful benchmark existed, management teams (and executive teams and boards) were forced to guess what reasonable or unreasonable performance was. This vacuum of facts created many absurd expectations. Today, Managed Service organizations are suffering from this same exact vacuum of facts. Just as Professional Services embedded within a product company IS NOT the same business as independent consulting, Managed Services within product companies IS NOT the same business as independent Managed Services.

George said to me “I see it again and again—companies under estimating the time and investment required maturing an MS platform.” With no baselines grounded in fact, I have found management teams will gravitate to optimistic fiction.

As we talked more, George began outlining the common mistakes he has seen product companies make as they work to establish an MS business. Besides underinvesting in general, product companies also miscalculate the shift required in the sales model. Managed Services is different from every other service line product companies establish such as Professional Services, Education Services, and Support Services. Why? Because Managed Services DOES NOT naturally relate to a product transaction. Think about the consequences of that reality for a moment. They are massive when it comes to creating demand for this service line.

By the end of the conversation, George had outlined several more challenges commonly faced by embedded MS organizations. I have asked George to publish a paper for the MS membership titled: “The Top Five Mistakes Made When Building a Managed Services Business.” Even before the data from his new MS benchmark starts flowing in, he knows what these common friction points are.

For more information on George’s work and TSIA’s Managed Services Discipline, contract George directly at george.humphrey@tsia.com

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

 

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.