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Bo Di Muccio
We are unquestionably experiencing a crisis, the likes of which no one has ever seen before. We haven’t even begun to understand the impacts of the COVID-19 pandemic on the world, let alone on our industry.
At least one thing we can be certain of is that the changes will be fundamental and far reaching. It’s more than enough to boggle the mind. Despite it all, I still often wonder whether there’s actually anything new under the sun. Let me explain.
For years now, I’ve been campaigning about the value of professional services to anyone who would listen. Closely related, I’ve been pontificating on the importance of good basic financial hygiene for your PSO. For TSIA’s Professional Services members, all of this has amounted to preaching to the choir. But outside of the core PS constituency, it has always been a much tougher sell.
It’s not hard to understand why this has been the case. In earlier eras, the industry was all about shipping technology, CapEx spend, land and refresh, etc. In the XaaS era, platform growth and recurring revenue are the drivers of P/E ratios, stock prices and valuations. In both contexts, services have tended to be viewed as context rather than core; at best a product enabler, at worst a necessary evil or nuisance.
Over the years, this persistent unwillingness or inability of tech executives to view professional services as a uniquely valuable asset has led to much wasted motion, many distortions, and a lot of frustration within the PS community.
Again, it’s not hard to understand why. Lines of business that enjoy widespread perceptions of high value get a better seat at the table and have more success influencing needed change, for starters. If you’re not viewed as a valuable asset, your influence is as tenuous as your seat at the table. You will constantly struggle to:
This brings us back to my perpetual pontificating on PS financial performance. In my 2019 State of Professional Services paper, I fleshed out these concepts in depth. The basic thesis of the paper is that while financial performance should align to the PS charter, there remains a basic level of financial performance that’s required regardless of charter for the vast majority of PSOs.
In other words, there's a “strike zone” within which the vast majority of PSOs ought to land. Too much emphasis on profit maximization can result in too little emphasis on customer time to value or customer success in general. Too LITTLE emphasis on profitability means that you’ll struggle to fund your own innovations and investments. And – you guessed it -- your ability to position yourself as a “high value asset” to the company will nearly always be hindered.
All of this results in a vicious cycle: poor PS financial hygiene > low value perception > struggle to get a seat at the table > trouble finding investment dollars > difficulty improving your maturity and processes > leading to an inability to position yourself as a “high value asset.” This is the epitome of a self-reinforcing principle … the bad kind, that is.
If you’re in this pattern, the best way to break it is to establish a basic level of PS financial hygiene. If you’re currently demonstrating good sound PS financial hygiene and want to avoid falling into this vicious cycle, you should try very hard to maintain that level of performance. This is the sort of guidance we’ve been giving for years. It was valid before the XaaS revolution in tech, it’s been at least as applicable during the transformation that dominated our thinking until… last month.
In other words, if you’re with me so far, you are probably wondering how the COVID-19 pandemic might be affecting this guidance? Asked differently, do the fundamental principles of good PS financial hygiene change during a pandemic?
We don’t know the answer to this question for sure because what we’re facing is unprecedented… not “unprecedented” in the way that the term is insufferably over-used in common parlance, but actually, literally without precedent. It’s a net new set of problems we’re facing and it’s evolving every day.
The good news is that TSIA is working with its huge community and leveraging all its resources to stay on top of the fast, ever-changing developments. So we do know some things. Based on the Rapid Research Response poll for professional services that we launched last week here are some examples of what we can glean so far from PSOs as they attempt to navigate the COVID-19 pandemic:
PSOs are and are not ready for what seems to be coming. They will need to adapt, but not fundamentally change, their business models.
Generally, successful contingency planning has been, so far, hit or miss… a 50/50 proposition. However, PS organizations appear to be well-positioned to pivot to what is undoubtedly going to be a drastically higher need for the ability to deliver more of the PS portfolio remotely or virtually. But with financial or term easements (many times corresponding to project delays) already being commonplace, it’s no wonder that the vast majority of PSOs expect to see notable headwinds on PS revenue. New bookings will be much harder than usual to come by. If you combine that with the delays and easements just mentioned, few PSOs will be reaching their revenue targets this year.
These are no small challenges, and let’s face it; we’re in crisis mode. At times like this, it’s natural and normal to do crisis-mode things. We tend to focus on short-sighted fixes aimed at short-term survival, but without really considering the medium or long term effects and/or without really thinking through, how we can actually take advantage of the crisis drivers to build muscle and scaffolding that will help us really soar once we’re on the other side of the crisis.
Take this time to see how agile and adaptable you can be in building, selling, and delivering services in a way that responds to the current circumstances, but will also serve you well when the green flag comes out again. Above all, our primary guidance remains to innovate without jettisoning basic principles of economics and financial hygiene. Let me give just a couple examples.
Many of our members are creating minimum viable offers for fast ramp up during COVID-19, including highly favorable prices (low initial TCO) and free quick-start PS services. We think this is awesome. It’s a great way to move products in this downturn while helping customers who are suddenly rather cash strapped.
That’s a good thing to do, partly because it makes you and your company good global citizens. But these engagements should be packaged, sold, and attached with all of the rigor, discipline and cost management of a fee-based engagement. Don’t forget to calculate the cost of those engagements and the impact on your financial model. There should be a limited budget for those free quick-start services, and your financial model should be capable of absorbing that budget while still remaining profitable.
For those that have resources that suddenly are on the bench, the question surfaces about what to do with them. These resources are certainly accounted for in the cost-model but the reduced revenue impact of the crisis puts pressure on the situation… sometimes a lot of pressure. We are hearing from some members that they are leveraging these subject matter experts to develop new innovative offers, looking to drive higher value focused on customer outcomes when the green flag is raised.
Their intent is to focus the time on defining the offer in concert with sales and then doing a better job enabling sales and delivery of the offer with another goal of improving the “stickiness” or attach rate. As part of the financial hygiene it's important to track the cost of developing new offers, while at the same time forecasting the revenue expected from the new higher value outcome-based offers. Developing this new muscle will pay short and longer-term benefits.
Yes, there’s a downturn happening. Yes, you will be pressured to downsize, cut costs, eliminate everything but “required” investments and activities. No, we don’t know exactly how long this is going to last. But we do know it’s not going to last forever.
So… this is no time to suddenly lose faith in the value of professional services for company and customer success. None of that changes as a result of COVID-19. Very nearly the converse is true. If PS is a key element of LAER in normal times, it’s exponentially more so now. Keep your heads, stay agile, stay focused on driving value, keep your good PS financial hygiene and you’ll get through this, we’ll get through this, all of us will get through this.
We understand that our member companies, the technology industry, and the world at large have been impacted by COVID-19. Now, more than ever, we need to work together to get through these challenging times. TSIA is committed to providing visibility as quickly as possible into the changing industry trends and practices that come as a result of COVID-19. Visit our Rapid Research Response Initiative resource page for more information.
If you have any questions related to how COVID-19 is impacting your organization, we’re here to help.
Post Date: April 15, 2020
Bo Di Muccio, Ph.D., is the distinguished vice president of research, Professional Services, for TSIA. He is also the chairperson of the TSIA Professional Services Advisory Board. Using his nearly 15 years of experience in technology industry research, analysis, and consulting, Di Muccio develops and delivers research and advisory programs that help some of the world’s leading technology companies build and optimize their professional services business.
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 (858) 674-5491 or we can call you.