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In this episode of “The Business of Product,” Patrick Carmitchel, VP Product Management, TSIA interviews Laura Fay, Vice President & Managing Director, Offers Research & Advisory, TSIA, on the topic of LAER Efficient Solutions. They review the definition of LAER Efficient solutions, why they are important in B2B recurring revenue business models, and how you can build them. Listen to the discussion via audio or read the transcript to learn more.
You can also join community discussions to network with your peers and discuss topics like this one at our new TSIA Exchange.
Patrick Carmitchel, VP Product Management | TSIA
Laura Fay, VP Research - XaaS Product Management | TSIA
01:13 - What is LAER?
02:45 - Laura talks about her background and how it led her to her role at TSIA
04:40 - The relationship between Customer Success and Product Management
05:13 - Diving into LAER efficient solutions: Innovation & Differentiation
06:44 - Where we're at now and where we need to go as product leaders
09:24 - Cost to acquire revenue in an as-a-service business
10:44 - Laura’s experience with traditional vs. as-a-service conversion rates
12:16 - Intermission/About TSW
12:52 - Where to start with implementing LAER—truly understanding it
16:36 - Laura’s research and how to gain product alignment across an organization
22:14 - Product’s role in XaaS Channel Optimization
23:46 - Examples and practical insights of LAER efficient solutions in action
27:32 - Wrap-up
Patrick Carmitchel, VP of Product Management at TSIA: (00:01)
You are listening to the Business of Product where product leaders are empowered to transform technology and services. This is Patrick Carmitchel, VP of Product Management at TSIA. I'm sitting down today with Laura Fay, VP of XaaS Product Management Research and Advisory at TSIA.
We're talking about LAER efficient solutions, a popular topic amongst product leaders today. What are they, why should you care, and how do you build them?
Thank you for taking the time to discuss this critical topic, Laura.
Laura Fay, VP XaaS Product Management Research and Advisory: (00:27)
Great. I'm delighted to be here.
Patrick Carmitchel: (00:28)
So it's day two of TSW at the Aria Las Vegas. It was a pretty exciting showing yesterday. How's it going for you so far?
Laura Fay: (00:34)
The caliber of the conversations between executives across the industry is fantastic. We've got leaders from software, hardware, across product, sales, and services, sharing their experiences and learning from each other as well as obviously what the researchers at TSIA have to say. A very high caliber of business-level conversations. And I'm hearing from people that this is such a unique opportunity. They don't get to have these kinds of conversations at other conferences. It's uniquely brought people together. So, it's exciting.
Patrick Carmitchel: (01:13)
Absolutely. I liked the energy yesterday and the engagement, within some of the advisory boards as well. It was a very, very strong start to the day. We're here today to talk about LAER efficient solutions, but for those who are just now getting to come to know this newly accepted customer engagement model, what is LAER all about and why should it matter to product leaders?
Laura Fay: (01:34)
Great question. LAER stands for LAER; land, adopt, expand and renew. And it is the de-facto standard engagement model for any recurring revenue business. This is where you land the customer first, but very quickly you've got to get them up and running and getting them realizing value quickly, engaging with them to make sure that they're adopting the solutions and getting value from the solutions, looking for customers to expand their share of wallet or spend more money with you as a vendor in the expand phase. Then ultimately continuing to renew the relationship for the long term. This is pretty much the de facto engagement model for any kind of a recurring revenue business. Product management obviously to care about that because it is where the company generates revenue and this is imperative to be able to engage in that customer life cycle in a cost-effective way, in which product management has a big opportunity to impact all of the products and offers that they put out into the marketplace.
Patrick Carmitchel: (02:45)
This is an important time for product management leaders. Why don't you tell us a little bit about your story before we dig into this topic, and talk about how you came into product management, and your journey specifically to research and product management.
Laura Fay: (03:00)
I am, by background, a computer science nerd. I started my career programming for several years and ultimately moved into project management and then came up to leadership through the engineering side of the house and then pivoted over into product management from there. I've three decades of experience either on the engineering side, leading product management organizations or running the business from a general management capacity. Very recently before joining TSIA, I pivoted over to the value-realization side of the house from the value-creation side of the house, and started and scaled a customer success function and that was pretty eye-opening to be able to look back at the product creation process and being on the receiving end of that and trying to make it work with customers. That was a very, very illustrative part of my growth overall.
I've been through a couple of business model transformations. I've experienced how hard it is to turn a product mindset into a service mindset. That's a massive challenge of course, and as-a-service now. I was intrigued to ultimately getting engaged with TSIA to have the opportunity to bring a lot of those experiences into the TSIA community and lead the research practice for product management to research the practices that we need to master and strengthen in the product management community as a service business model.
Patrick Carmitchel: (04:40)
I think one of the unique things that you do bring is this connection to the services side of the house and specifically the relationship between customer success and product management in the future of the complete product and as-a-service.
Laura Fay: (04:53)
Of course, we know product management and customer success have a very special relationship that's emerging and evolving and figuring out how to optimize between those two constituents for the benefit and the success of the offers in the marketplace and the success of the outcomes for the customer.
Patrick Carmitchel: (05:13)
Let's dive into this topic of LAER efficient solutions. You suggest in your session that innovation and differentiation aren't enough to thrive and it has a service business. Let's talk about that because, for product leaders, those two words - innovation and differentiation - are top of mind.
Laura Fay: (05:30)
Absolutely. You know what we learned as-a-service business model is that it's not a case of you used to do this, now you must do that. It's not "and/or" conversation, it's an "and" conversation. So, innovation and differentiation are the absolute core of what product management is all about. Like what's the strategy? How do I differentiate from my competitors, my value proposition? All of that still is essential. The thing that needs to get added to that is how do I do that now in a new business model and engage along this LAER customer engagement model in an efficient way and to move along the maturity curve to LAER efficiency becomes essential to inject scale into that as a service business model and ultimately deliver both not only growth of the top line, but scalability of the operation and profitability of the bottom line. So if you want to have a growing, scalable, viable as a service business, you have got to add LAER efficiency as one of the things that you've no choice but to master.
Patrick Carmitchel: (06:44)
Now in your keynote yesterday, this was pretty interesting. You had a poll and I think the results were very telling about where we're at now and where we need to go as product leaders. Why don't you talk about that?
Laura Fay: (06:56)
That was a good one. So, what I asked the audience to do was to weigh in on the fluency of the product management teams within their companies on the formula for annual recurring revenue. So, we know annual recurring revenue is the total value of the contracts that are up for renewal in a given period. You bring in new logos that add to that, maybe you discount that takes away from that. You've got customer churn and maybe down renewals that take from that, you have a price increase that increases that you have upsell and cross-sell that can increase that further. There are a lot of ins and outs in the formula for annual recurring revenue over the course of a year. So, I asked the audience to weigh in on the fluency of that within the product community. And what came back was, was three levels, low, medium and high, and high being, you know, you could ACE the class, and the results came in at 9% said they could ACE the class as in they could walk up to a whiteboard and they get to describe ARR and all of the ins and outs of it.
Patrick Carmitchel: (08:02)
Where we're at and the caliber of leaders from the top technology firms in the world.
Laura Fay: (08:09)
Absolutely. Exactly, Patrick, to talk about the audience who was in the room. It's the who's who of technology companies that we, all, all the brands that you would expect to hear in that who are part of the TSIA membership. So, yeah, I mean it's pretty telling. So I would submit that if a product management team does not fully understand or can articulate how their company makes revenue and as a service that they may be potentially compromised and how they define offers, pricing, packaging, the attributes of the product and even, and some of their practices are optimized for how their company makes money as a service. So that was pretty telling and I think it creates a huge opportunity. We all know product management is full of very innovative folks. So once you understand that, I think it's a phenomenal opportunity for companies then to sort of unleash that into, the process of defining viable solutions that they can then put out into the marketplace and have their sales team and their channel partners and their service organization engage with them in a way that's gonna move the needle for the company and the business.
Patrick Carmitchel: (09:24)
Yes, absolutely. But also, you know, you do talk a little bit about how it's more costly to acquire revenue than as a service. Isn't that just about a business scale issue?
Laura Fay: (09:36)
That's a great question, Patrick. What we see in the data, and we've studied this generally and as a service, it is more costly to acquire a dollar of revenue than it was in traditional business. And part of the reason for that is very often organizations are using the same sales construct, right? Their whole sales organization now to sell subscriptions when prior, they were selling, you know, big-ticket, perpetual licenses. And so the dollar amounts that come in and get recognized as revenue are significantly less in a given period. So, the cost of acquiring that revenue is significantly higher. And so that's something that we've got to acknowledge and sales is going on their journey of transformation to try to bring down those costs. But there's a lot that product can do as well to influence that. Things like product assisted growth where you deliver leads for people who are using the product is maybe even more valuable than, you know, the traditional marketing informational kinds of leads that get generated.
Patrick Carmitchel: (10:44)
Right. So you're referring to inexperience, you know, for instance, if you're within the application, or within a solution.
Laura Fay: (10:51)
Absolutely. Yeah. And I'll give you a perfect example. Way back in the day in the mid-2000s I worked at Salesforce and at that time there was a personal edition of Salesforce. And so individuals would take this on board, start to add their contacts to it, and maybe some of their own sales opportunities to it, even if they were an individual within a big organization. But they figured out pretty quickly that if you start to invest in that trial, if you start to put your data into that and you start to use it and you have even the smallest amounts of value that the conversion rates from those experiences were significantly higher than finding a lead who's just reading about your product on the website. This is sort of that "I've now invested my time and energy," the whole sunk cost idea and now it's even starting to be a little sticky. There's a huge role for product to play in what we call a project assisted growth strategy and having customers even in bigger, more complex industries experience the product and not just experience a demo environment, but experience it with their data, with their environment, and that the transition from prospect to customer just essentially is, you know, the contract and a flip of a switch and they're operational.
Patrick Carmitchel: (12:16)
Thank you for taking the time to tune in. We will continue the interview in just a moment, but before we go ahead, I want to make sure that our listeners know how to access the presentations from today's session. If you are an attendee at TSW Las Vegas for the next 30 days, you'll have access to all firstname.lastname@example.org/conference. That's TSIA.com/conference and if you're a TSIA member with an X as a service, product management research subscription, you can go to TSIA.com anytime. Sign in and access the member resource center. There's a whole lot there for you, including all the presentations from the conference. Let's get back to the interview. Now let's say that a product management leader says, "Yeah, I get it. I have a role to play in LAER." Where do they start? If their company is really in the process, of trying to adopt this across their functions as a leader in product, how should they influence this transformation?
Laura Fay: (13:13)
That's a great question. You know, in the session that we had on this, I talked about 10 actionable points of impact, but I think one of the simplest places to start is to ensure that the organization truly understands the business model of as-a-service. There's probably a few things to get foundational information on. One is truly understanding the LAER customer engagement model. Understand the formula for ARR at a detailed level, right? Understand the as-a-service P and L, because every decision that product management makes in some way or other is going to influence the customer outcome. But it's also going to have an influence on ultimately the P and L. Whether that's the cost of hosting, a lot of technology and architecture challenges there, the costs of service, the customer that's going to take a hit on the gross margin if we do that right or not, and ultimately the revenue growth. So I would say get clear on the foundational understanding. I think what I've seen and what we see in the data, with the TSIA membership is that folks understand things at a cursory level, but really, don't understand it at a more detailed level. And certainly MBA classes, there's many of those in the project management organizations, but they don't teach this in business school. And I'm going back to a question, Patrick, that you asked me earlier regarding the cost of revenue acquisition. Does that get solved with scale? So again, what we see in the data is that it's getting a little bit better with scale, but it doesn't ultimately get solved with scale. So when we say, well, you know, we're investing in sales and we don't care about profits as we're growing, right as our timeline, our horizon to profitability is way out there, maybe we're not thinking about that. So is this, when we talk about the cost of sales, is this is not just an issue for small companies that are on a very high growth path, but when we get to a big numbers that this all sorts itself out and what we see is that that's not necessarily, so some fundamental things have to happen in the engagement model moving from sales from a time where sales owns the account to sales is now shared with customer success, right? Where they're both contributing to the revenue, both on new sales and renewal, sales, and expansion sales to ultimately a place where the process essentially owns the accounts. And some of those things are massive cultural shifts for organizations to make and they take time. And again, to pick on my old employer a little bit to highlight this, it took Salesforce 18 years in business before they showed their first net operating income profit above zero. So that's, that's a really big deal, right? It took that time for that to happen.
Patrick Carmitchel: (16:36)
Yeah. And then, you know, there's a mindset around growth. You know, that there's different math that exists for the growing company. But in the end, there's going to have to be a reckoning, profitability. It will come knocking at some point. This is obviously a very big topic. There's a lot of working parts to addressing the efficient emotions across the LAER engagement model, and product's role in that really your research and advisory practices starting to address. So I'd like to hear a little bit more about specifically what motions within the research that you've started to apply to solve for this, to provide insight, to this community. And also, where are the greatest allies going to come from to help product leaders? Is it within another function? Where are they going to get the greatest impact? Cause when you have a large cross-functional transformation like this, you need to start to find the allies to build alignment across the organization.
Laura Fay: (17:50)
So two questions there - one was about the research and what we're doing to help address this and then the other one is where are the allies cross-functionally for product in that journey? On the first one, you know, the research practice is the topics that I delve into and do primary research on is informed by the challenges that I hear from product leadership across the industry. And as I talk to executives and leaders in the industry, they tell me things like, we're trying to figure out what is the revenue and effective rather than who makes for office as a service business. How do we define new as a service offers that are holistic in nature and take advantage of the technology, the services, the data and the analytics that we know we need to bring to bear to solve, the customer's challenge? How do we price things? What are the typical pricing models, right? And how do we effectively price that to keep value in the sale? And how do we govern our pricing right? Cause we know traditionally both the customer and sales are addicted to that whole discounting strategy, but we also know its services since as a service effect, is service ongoing. We know that in services discounting is, is not a great idea, right? You're going to kill your margins. And if you start with that kind of relationship to highly discounted, it's just going to keep recurring. You may not ever make a profit from that business. So we're looking at things like that. What are the, what are the customer experiences that make the solution sticky? What are the most effective ways to instrument the product and share the benefit of the resulting analytics cross organizationally? How do I transition from my traditional business to my, as a service business without, you know, really killing the golden goose, if you will, of these great relationships and profitable businesses that I've had with certain customers over time? How do I make those transitions, not only from licensed management, but how do I shift the deployment models at the same time? So a lot is going on for product. And how do I set up an incentive structure for my product management organization to focus on the right things? Adoption is a huge area there. So there's a whole agenda of research that comes out of that. I have an advisory board made up of very, very highly respected individuals within their organizations, heads, executives, heads of product who helped me prioritize where we think that the most insightful priorities are going to come from. That's the pathway that I'm on, specifically as it comes to this LAER efficiency, how to develop LAER efficient solutions. Recently I've just developed a self-assessment checklist if you will for the product organizations who as members can take this and can kind of self evaluate how they're doing against a maturity model for their solutions. And then ultimately that can help how they can prioritize. What's interesting here is that LAER efficiency, you know, needs to align with and mirror, if you will, the journey that the customers are on and the journey that the sales and service organizations are on. So ultimately, getting back to your question there, this is where their allies are going to come from. Services desperately need certain things from the product for them to be successful in this new customer engagement model and sales needs that as well. So collaboratively working with the sales leaders and the service leaders, the chief customer officers, and chief revenue officers and the chief product officer, that's a powerful trio. And together, there's an opportunity to help understand how together they can navigate this transformational journey to as-a-service.
Patrick Carmitchel: (22:14)
Absolutely. I think that was well illustrated when you just dropped into the executive round table at X as a service channel optimization the other day, and the impact that the product is having or the lack of impact that they are having on the channel. And the awareness of how to address that.
Laura Fay: (22:32)
Absolutely. Absolutely. There's a lot more at stake, of course, with the channel and traditionally in product, honestly, and I was, you know, I can say this because I was one of them. You didn't think too much about the channel. You did a little bit, but essentially somebody in the sales organization managed the partner relationships and it was a push out, right? And they figured out what additional discounting needed to happen for the channel partners to make money. And as a service that's all thrown up in the air, the partners are struggling to figure out how they're gonna, how they're gonna make money, right. And how they're going to contribute to, the overall growth of the company, of themselves and their supplier partners in this new as a service model. So, we, you know, shift left and move upstream to the value creation phase. That's gotta be part of the whole, the whole design process, if you will, of fundamentally of the business. Strategically, what is the role that these folks play? How do we go to market and how do we create solutions that some community of partners can actively play in?
Patrick Carmitchel: (23:46)
Yeah. So, I think that what would be helpful is to understand maybe an example of someone you feel like is actually on that path of developing LAER efficient solutions.
Laura Fay: (23:56)
Let me just answer that question in the context of how's the industry doing? Generally, if I think about traditional models and LAER experiment, LAER effective and LAER efficient and that being the maturity curve, what we see through all of the data sources that we have and working with tech companies day in and day out is that the sweet spot of where we are now as an industry is still really in this LAER experiment phase. We're standing up customer success functions, we're engaging with customers to help them realize value and outcomes. Still kind of a costly model. Now at a macro level, some companies really have kind of moved on to much more of the effective and efficient, parts of the maturity curve. Microsoft is probably one phenomenal example where they have if you look back at their P and L and how they've dramatically shifted revenue from the product side of the house to the service side of the house, right? So the cloud services, anything that's as a service in that service bucket, and may make that pivot unapologetically, full-on acceleration into those models. And they've made tremendous progress in aligning all of their functional and their organizations behind that from sales to the engagement. And then product fueling, the product organizations fueling, those customer engagements. And we see many other kinds of great examples. For example, if we start to kind of try to bring down the cost of sale, some of these moving online with the eCommerce solutions. Autodesk is a good example. A good portion of their revenue now is coming from online sources. In fact, even some of their enterprise accounts, when it's convenient for them, they'll just go transact online and pick up a new product and have that factored into their enterprise agreement. You know, later on down the road.
Patrick Carmitchel: (25:59)
Right, so it looks like there is a light at the end of the tunnel here. Do you have any other examples?
Laura Fay: (26:02)
Oh, absolutely. Many organizations now really, really focused, acutely focused on designing solutions for adoption. Kind of proactively thinking about what that adoption journey is and of course the very first step in that is onboarding. So we see about half of all of our member companies who are acutely focused on that streamlining and taking all the friction out of the onboarding process and trying to measure that first time to value because we know that the research shows that if you get that onboarding experience right and customers experience a very fast time to value, they are way more likely to renew. So that's key, and we see a lot of activity in that area. Another area of course with the advent of data and analytics, we see companies taking a lot of opportunities there to now actually augment the value proposition with data and analytics for their customers, and in many cases, they're able to monetize that because they can look across a collection of customers, they can bring collective insights, enable things like pure benchmarking and tee up some analytics to their customers in a way that historically that was not possible. Perhaps with, you know, isolated on-prem type solutions. So there's movement on all fronts. There's movement on all fronts. So it's an exciting time. There's just a lot of change and a lot going on.
Patrick Carmitchel: (27:32)
Yeah, it is. It's going to be interesting to see as companies start to address not just in the value creation but in the value realization stage, the entire customer engagement model is pulling all of these functions together, in a way that is sort of unprecedented. We're coming to the end here. Thank you so much for taking the time, Laura. For those of you who are participating in the research practice, as a member at TSIA, you do have access to get your copy of a self-assessment for LAER efficiency. And you can get that at the member resource center at TSIA.com. And that's it today on the Business of Product. Thank you for listening.
If you have not already attended Technology and Services World, I would certainly encourage you to do so. This is the chance to engage with product leaders from the best technology companies in the world like we are right now to gain new insights and accelerate the success of your products and services. TSIA hosts TSW annually in both the spring and the fall. And you can go to TSIA.com/conference to register and learn more anytime.
For additional information on the topics discussed, please visit the following resource links.
Blog Post: LAER Efficient Product
Conference Presentation: LAER Efficient Solutions: What are they? Why should you care, and how can you build them?
Post Date: July 16, 2020
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Laura Fay is the vice president and managing director of offers research and advisory for TSIA. She also serves as TSIA’s vice president of XaaS product management research. Laura is a technology industry veteran with over 30 years' experience driving business growth in the enterprise technology industry via leadership roles in product management, general management, product development, and customer success.
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.