The Case for Customer Success in Managed Services

The Case for Customer Success in Managed Services

One of the top business challenges facing our Managed Services members is about selling managed services. In fact, this is easily the SBC (Service Business Challenge) that I spend the most time on while performing on-site workshops with them. It seems that most of the focus of the managed service provider is on the Land motion within the TSIA LAER model.

While selling managed services is, without a doubt a significant objective, the need to continually support, nurture, and grow your customer is just as important. When looking at the TSIA LAER model in the context of managed services, the Adopt, Expand, and Renew area is often grossly neglected by business owners. If organized and staffed properly, focusing on the AER portion of LAER will turn your managed services business into the gift that keeps on giving.

A Quick Look at How TSIA Researches These Top Service Business Challenges

Before TSIA makes any recommendations for solving a particular SBC, in this case, growing managed services, we first need to look at what the data tells us. At TSIA, we have now benchmarked more than 80 managed service businesses. This high number of providers allows us to dig deep into the data and establish proven best practices through correlative analysis.

This requires several steps in the analytical process:

  • The TSIA researcher selects a practice (it takes expertise to test the right practices)
  • The researcher identifies metrics and results where the presence of the practice seems to result in improvement
  • Outliers in the data are removed and the researcher tests the correlation again
  • The TSIA researcher then models the impact of factors related to peer groups (company size, percentage of total company revenue coming from services, etc.)
  • If there is still strong correlation between the presence of the practice and the performance improvement, TSIA marks this as a “proven best practice
  • TSIA then documents and monitors the Observed Performance Improvement (OPI)

The OPI is the performance difference observed when this practice is in place, though this doesn’t mean every company will immediately receive this performance improvement the moment they implement this practice. However, because of the regression analysis performed in the previous steps, there is a high probability that implementing this practice will result in an improvement in results.

Simple enough, right?

Where Customer Success Managers Can Help Managed Services

We’ve observed that in order to successfully grow managed services, the focus on the customer’s objectives in order to deliver outcomes must be improved. To further develop this focus on the customer base, a key practice in managed services is to employ a role called the “customer success manager”. This role is also known by other names, such as engagement manager, client business manager, customer relationship , etc.

To understand how important it is for a managed service provider to focus on their base by employing this role, we can test for this practice and compare whether or not a provider has this role in several key metrics such as Base Revenue Growth and Recurring Revenue Retention (conversely the recurring revenue erosion rate). The bottom line is that this role focuses on servicing the customer. They have the “trusted advisor” relationship with the customer’s senior executives. They don’t force an after-market sales engagement, it happens naturally. They are ultimately responsible for understanding the temperament of the customer, the renewal, any upsell and cross-sell opportunities, etc. Think of them as a nurturing farmer that cares deeply about how the health of their crops and they ensure they’re growing for a strong fall harvest.

The alternative to using a customer success manager for managed services would be to either use the General Sales team or, frankly, leave the success of the agreement to chance. Many managed service providers believe if they’re meeting SLAs (service level agreements) and helping the customer achieve the intended outcomes of the contract, renewals and base growth will happen naturally. The data tells us otherwise.

Using Data to See the Impact of Customer Success Managers on Key Metrics

Let’s look at what the TSIA benchmark data for managed services tells us about this topic. I recently did a conference presentation called, “Managed Services and the Case for Specialization,” where I looked at four different practice areas for managed services and how having (or not having) that practice impacted key metrics.

The first question to ask is, “What is your current model for supporting your existing customer base?” According to the most recent data, 40% of our members use the General Sales team, 30% have a dedicated Customer Success role, and 30% have no formal base governance model.

Step number 2 is to then gauge the impact of those three models on key metrics for managed services. For this blog, the two metrics we’ll look at are Base Revenue Growth and Total Recurring Revenue Retention.

Here is the TSIA basic recommendation for the calculation of these two metrics:

Base Revenue Growth

This metric looks at the growth of base customers only.

How to calculate:  Most current full year revenue from existing customers (excluding revenue from new customers) minus previous year base revenue. Divide the difference by the previous year’s base revenue. Convert to percentage.

Total Recurring Revenue Retention

This metric looks at the amount of revenue from the previous year that is carried forward to the current year.

How to calculate: Total current year’s recurring MS revenue (minus any new recurring MS revenue from current year) minus previous year’s total recurring MS revenue. Divide that number by the previous year’s total recurring MS revenue. Convert to a percentage.

In this next box plot chart, we can see where the performance of the members falls for each one of the three practice responses above in the previous image. Not having a formal customer success model results in zero base revenue growth. Using the General Sales team to govern existing customers results in a 5% base revenue growth, while having a dedicated Customer Success team results in a 17% growth rate. That’s more than 3x the base revenue growth of General Sales!

In the following donut charts, we can see what the impact of the different models is on recurring revenue retention. TSIA members with no formal customer success model for managed services have a 93% recurring revenue retention rate. General Sales only retains 91% of the recurring revenue. The members with a dedicated Customer Success team come in with the highest recurring revenue retention rate at 96%!

The previous two charts are compelling enough on their own. However, the following two waterfall charts tell an even more revealing story. Here, we can look at the combined view of total recurring revenue at the start of the year and the effects of having or not having customer success has on the end of year performance.

This is the same view but for members with a dedicated Customer Success function.

This is the view of a non-dedicated Customer Success function. These charts apply the correlated medians to a fictional MSP with $200M USD in annual recurring MS revenue.

Companies without a dedicated Customer Success function, that are growing new revenue at the industry median rate of 6% are working hard just to stand still with only a $1M growth on a $200M base. Companies with a dedicated MS Customer Success Function grew the business by $38M. In fact, the dedicated Customer Success managers are out-selling the net-new Sales resources!

Why You Need to Invest in Customer Success for Managed Services

By themselves, the graphical depictions make the case for the investment in a dedicated Customer Success team. They’re more tuned in to their customers needs, understand the key reasons customers have purchased a managed services agreement, and also know how to be prescriptive when suggesting additional products and services the customer can benefit from. Because they’re the “trusted-advisor”, the customer is more likely to act on those prescriptive recommendations.

Though the customer success role is often viewed as incremental headcount cost, clearly the benefits warrant the investment.

TSIA recommends that you assess your current customer success model for managed services. It’s important to understand how that relates to your current performance model. If you don’t have a well-defined approach to customer success for your MS business, feel free to reach out to us to discuss!

If you’re coming to TSW San Diego 2018, I’ll be sharing the above concepts in detail, which follow our conference theme of “Blending Service and Sales Motions.” Here are just some of the relevant sessions where I’ll be presenting:

In the meantime, you can also catch other posts in our “Blending Service and Sales Motions” blog series that I and the rest of the TSIA Research team are putting together. In this series, we will be sharing the benefits of combining the talents of multiple functions within your organization to increase profits and delight customers as they relate to our respective areas of research. Check them out!

Read more posts in the "Blending Service and Sales Motions" blog series: