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Convergence, a term meaning "to come together," is a common theme that has impacted various service lines within the technology industry, and customer success is no exception. As more technology suppliers pivot towards new XaaS offerings, they are finding themselves in a constant cycle to deliver against the promise of their technology solution, which is how we define customer success. In their efforts to ensure that their customers achieve specific business outcomes, these organizations are seeing traditional services capabilities and organizational boundaries beginning to blur, or "converge." At TSIA, we've observed three areas within today's organizations that are seeing the most convergence with customer success: sales costs, service portfolios, and service organization structures.
Since 2008, TSIA has been collecting public financial information for top technology companies to compile into a quarterly report called the Technology & Services 50 (T&S 50), which provides observations on current trends and allows us to spot upcoming ones. We do the same for cloud companies in an index known as the Cloud 40. After years of collecting this data, a trend we see when comparing the two indices is that cloud companies will need to improve their sales and marketing costs in order to scale and achieve GAAP profitability.
Over an 18-month time span (from Q2 2015 to Q4 2016), we've seen these Cloud 40 companies make incremental improvements in lowering their sales and marketing costs, going from 40.1% of total revenue in Q2 2015 to 35.4%. However, this achievement pales in comparison to the same metric in the Technology & Services 50, whose percentage of total revenue dedicated to sales and marketing hovers steadily in the 26% to 27% range. Based on this data, it's critical for cloud companies to continue lowering their sales and marketing costs if they want to improve their operating income.
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Source: TSIA Cloud 40 Index
Source: TSIA Cloud 40 Index
To improve operating income, cloud companies must lower their sales and marketing costs.
As technology companies further evaluate their sales expense line, we anticipate seeing more investment in the customer success capability to help lower these sales costs. According to data collected in TSIA's 2016 Customer Success Baseline Survey, we found that technology companies utilize sales representatives to sell renewal contracts 36% of the time, which is an expensive way to renew contracts. While there might be valid reasons behind it (renewal complexity, negotiating a large renewal uplift, identification of large expansion opportunities, etc.), there hasn't been a correlation of a more expensive resource to a higher renewal rate which is one of the key supplier outcomes in a recurring revenue model.
To that end, this survey also allowed us to evaluate the top performing customer success organizations, of which we were able to segment the top quartile by the highest renewal rates and expansion rates, another important supplier outcome. By doing this, we found that it's common practice for these high-performing customer success organizations to have a customer success manager (CSM) or a renewal representative take charge of renewals rather than sales. This is counter to some of the common objections we hear from companies on why they don't want to switch to a more efficient sales model.
[...] we found that it's common practice for these high-performing customer success organizations to have a customer success manager (CSM) or a renewal representative take charge of renewals rather than sales.
For your own company, TSIA recommends that you carefully evaluate all of your sales costs, including customer acquisition costs (CAC) and customer retention costs (CRC), which include adoption costs and customer expansion costs (CEC). We believe that when customer success is done correctly at scale, it will be a distinct services motion and organization funded from sales. This inevitable convergence of services and sales costs will unlock the path to more efficient sales costs and higher operating incomes.
This survey data also showed us that 49% of technology companies are monetizing some portion of their customer success portfolio. To dig deeper into the makeup of these portfolios, we found that many of these customer success offerings presented themselves more like a converged services portfolio. Here's an example of one such portfolio from Symantec.
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When you dig deeper into the messaging of the portfolio, it becomes apparent that there are four individual service lines, along with their associated service capabilities, that are needed to make up the broader customer success offering:
49% of technology companies are monetizing some portion of their customer success portfolio.
Behind the scenes, there is solid cooperation needed in order to ensure that the technology supplier can deliver against this converged portfolio. This potentially includes both revenue and expense attribution to traditionally siloed profit and loss divisions. In this example, customer success is acting as both a theme as well as a service line associated capability.
After evaluating other similar models, we found that this converged service portfolio capability was commonly tied to a customer success theme whether it was sold separately and monetized by the technology supplier, or if it was included as part of the overall technology subscription.
We're beginning to see organizations align toward a new converged services organization structure. In our 2015 Services Organization Structure Survey, we learned that "customer success" is gaining ground as the descriptive term for the complete global services organization. A common practice included in the following service lines reporting into a global or customer success executive: customer success, consulting services, technical services, and field services. Additionally, education services and support services would report into customer success more than 40% of the time.
The main takeaway here is, as customer success continues its evolution, there are many lessons that can be learned and shared across the industry.
This blog merely scratches the surface of how organizational convergence is impacting our industry, so I encourage you to join us for our spring Technology Services World conferencewhich follows the theme, “Organizational Convergence in a Recurring Revenue World.” There, I will also be delivering a TSIA Power Hour session called, “Customer Success Convergence,” where I will provide data points and case studies to help showcase the intersection of sales, marketing, customer experience, and other functional capabilities back to the customer success teams and initiatives. We'll have tons of material on convergence and industry best practices for every line of service in tech, so I hope to see you there!
Post Date: March 9, 2017
Phil Nanus, is the former vice president of customer success research for TSIA. In this role, he worked closely with member companies to deliver research and advisory programs focused on helping them optimize their customer success organizations and effectively deliver customer outcomes. Throughout his career, Phil has held various positions related to enterprise software and IT services, including global leadership roles in customer success, support, professional services, managed services, and cloud services. Prior to TSIA, he was the vice president of customer success at Infor, where he led a team of Customer Success Managers (CSMs) focused on driving customer adoption of their technology.
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The Technology & Services Industry Association (TSIA) is dedicated to helping technology and services organizations large and small grow and advance in the technology industry. Find out how you can achieve success, too. Call us at 800-876-6511 or we can call you.