I’ve been a fan of business frameworks and models, something I’ve shared in the past including those developed by SiriusDecisions for the marketing profession. For fans of frameworks and models applicable to the services and support market, Technology Services Industry Association (TSIA) and their Technology Services World (TSW) event never disappoints.
This year was no different. Having been in the high-tech market for close to 30 years, I quickly realized during the TSW keynotes that the degree of change over the last few years has by far outpaced the past few decades. Overall technology spending, which consists of all solutions and services, continues to decline after peaking before the start of the Great Recession in 2008. While product revenues continue to fall primarily for hardware and some areas of software (mainly on-premise), technology services are growing – and especially cloud- and subscription-related revenues.
Everything-as-a-service (XaaS) is shaking up this industry to its core. The services firms that are still focused upon on-premise software and solutions are profitable, but are realizing little growth (if not declines) and will continue to do so in the foreseeable future. On the other hand, services firms and integrators that are adopting a cloud- and subscription-based model are experiencing even greater growth but are not yet profitable. And considering that marketing and sales expenses take a significant chunk of revenues, neither of these approaches is sustainable.
Clearly, we are in a period of transition. The good news is that things will eventually level off and a certain element of normalcy will return. But until then, firms need to transform their business models, processes, and ways of working to survive, and yes, grow.
Bringing profitability and growth back into the services business
I am reminded of this new reality as I prepare to host a webcast this week featuring Delak and its journey to the cloud. As we developed the content, it became apparent that there is a fundamental shift happening – from capital expenditures (CAPEX) to operational expenditures (OPEX) – and the key is to link change to predictable business outcomes.
Customers require a reliable partner to deliver results from sophisticated technology and to insulate their organizations from the complexity it may introduce. Not surprisingly, that includes stakeholder demand revenue and equity growth, as well as profitable and predictable annual recurring revenue (AAR). The theme of AAR and profitability and growth was a major focus at TSW.
Running a business based on recurring revenue is very different from running one that is CAPEX-driven. And again, the challenge of growth and profit is front and center. As noted earlier, services firms are not growing both profits and growth in aggregate. Stepping away from a traditional, full-service, and operations-intensive business model, business that adopt a recurring revenue approach can successfully add an element of self-services to the mix. By no means does this capability diminish the experience; rather, it enhances profitability while maintaining fundamental goals such as customer success and more.
While this business model transition is happening all around us, it’s clearly not happening fast enough. Like any model of change and adoption, there’s a growth phase and an inflection point where things accelerate and later level out.
Right now, we are at that leveling out phase and need to drive change more rapidly. Three things come into play when accelerating such a transformation:
- Organizational alignment for the future state – this is classic “people, business, and technology” and the human element is critical
- Planning for funding sources and revenue attribution, especially the all-important issue of revenue credit within an organization
- The role of services in overall account growth, which validated the new normal for the services team’s expanded role in innovation and new technology
The XaaS, self-services model and fully embracing the reality of cloud and subscriptions allows organizations to ultimately realign costs back to profitability.
The “Land, Adopt, Expand, and Renew” (LAER) model for services firms is fast becoming the de facto standard for how we deal with innovations and XaaS solutions. At the same time, customer-facing organizations can map this model to its “Plan, Implement, Monitor, and Optimize” framework. TSIA presented a nice evolution of the “plan, build, and run” that we’re so familiar with as technology and services marketers.
From TSIA’s perspective, services touches existing customers tenfold more than sales, which makes sense since services teams are aligned to continuously support the customer, on-site with projects and provide end-to-end support. Plus, the incremental cost of adding a sales responsibility to an existing service touch point is 90%–95% less than adding another sales touchpoint, which is proof that services-led opportunities are the way for today and tomorrow.
We are in a brave new world, and the leaders now and in the future will leverage services and solutions capabilities to fuel profitable growth. Check out my TSIA/TSW 2016 “virtual trip report” to learn more.