Congratulations! You are a managed services (MS) contributor and leader in a hardware or software original equipment manufacturer (OEM). You’ve been struggling with your company’s love/hate/embrace/ignore approach towards MS in the past. You’ve had your share of successes and failures acting as a change agent for your business and sometimes wondered if you were alone, if it was worth it, and if the business was ever going to realize its full potential.
And now, your executive management made a big splash about a new or renewed focus on MS! Maybe it was a call-out highlighting your MS capabilities in a 10k or a quarterly report, or even a press release or internal announcement about the importance of your company’s MS practice or key MS customer wins. Or, just maybe, MS was identified as one of your company’s “strategic pillars” going forward, and all your dreams about one of the hottest growth areas in tech are about to come true!
But, how do you know if this is more of the fits and starts you’ve seen in the past or if it is really going to catch fire this time? How do you know if this is just (managed) lip service, and if it is, what are you going to do about it?
Managed services now represent over 22% of service revenues. Incidentally, managed services is now equal to professional services as a revenue contributor for these members.
Background: Managed Services Highlights from TSIA
The growth in MS over the past five years is undeniable. TSIA began covering managed services as one of our core focus areas 5 years ago. In that time, we’ve been talking about, analyzing, tracking, and encouraging the growth of managed services with our member companies. Here are some year-by-year highlights:
- “TSIA data clearly show that the fastest growing of all high-tech service lines is managed services.” — B4B, 2013.
- “The fastest growing service line is managed services. Many companies are now starting to realize that a managed service play is no longer a ‘nice to have’ part of the portfolio. It is a requirement and critical to the long-term health and evolution of a technology company.” — “The State of Managed Services: 2014.”
- “According to the Service 50 data, all service revenues grew at 2%. According to the latest TSIA Managed Services Benchmark data, managed services overall revenues have grown at 39%. Saying it another way, managed services revenues (new and base revenue) have been growing almost 20 times faster than the services market as a whole.” — “The State of Managed Services: 2015.”
- “Managed services grew to a total of 12% of company revenues in 2015. As a percentage of overall services, managed services grew from 6% of total services revenue to 24% of total services revenue.” — “The State of Managed Services: 2016.”
- “Today, managed services that help operate the technology are the fastest growing part of the traditional tech industry. More importantly, the average annual growth rate of these MS revenues exceeds 30%. This growth rate is far outpacing the average growth rate for product revenues we see in the industry today.” — Technology-as-a-Service Playbook, 2016.
- “2016 is the year managed services evolved from being a niche offering to being a mainstream component of their overall portfolio. In fact, managed services now represent over 22% of service revenues. Incidentally, managed services are now equal to professional services as a revenue contributor for these members.” — “The State of Managed Services: 2017.”
Why OEMs Love and Hate Managed Services
So we can see that, over the years, the emphasis, focus, and growth of MS has been progressing strongly. There is no denying that customers are increasingly accepting of, and demanding, MS models, especially from OEMs. So, OEM executive leadership gets excited about growth areas, especially when they are seeing consistent declines in their core product and support lines of business.
Yet, many OEMs with a MS practice often haven’t given the business unit the care and feeding required to take advantage of one of the fastest growing markets in tech.
There is no denying that customers are increasingly accepting of, and demanding, MS models, especially from OEMs.
We’ve written repeatedly on why this is the case, most recently summarized in our book, the Technology-as-a-Service Playbook. Here’s an excerpt from the book that illustrates this:
“[Executive leadership at OEMs] are extremely reticent to sign off on any offers that may increase company risk, reduce cash flow, or impact the margin profile of the company. The customer is asking for managed services, but the CFO and other executives at your company are quick to raise the following concerns:
- We don’t own customer assets. When negotiating MS deals, customers may not want to purchase the technology assets being managed. This means the provider has to carry the cost of these assets on their books. CFOs may be loath to reflect lower retained earnings on the balance sheet as a result of these added costs.
- Delayed revenue recognition. If the customer is not paying for the assets up front, that means the revenue for this technology will trickle in as part of a long-term service contract. Not ideal! We are a product company—we recognize product revenue, and we recognize it as soon as legally possible!
- Service revenue intensive. These MS deals are going to increase service revenues and decrease product revenues. Our financial model indicates how much revenue should be coming from products versus services. We will start looking like a services company to the street—which is not what we historically said we were.
- Increased risk. When we sell technology assets, the customer is ultimately responsible for achieving their target business results. With these MS contracts, we are taking on increased responsibilities. We are introducing new risks to the business. We may fail to meet contract SLAs and pay penalty clauses. The customer may be dissatisfied and cancel halfway through the contract. We might make an error in the customer environment and be sued.
- Channel conflict. Other executives beyond the CFO and CEO will start chiming in with their concerns. The executive who owns channel partners will be concerned that new MS offers conflict with partner offers. ‘We are stealing the bread from our partners’ mouths. They will jump to selling the product of our competitors.’
- Complex sales cycle. The sales executive may have concerns about the ability of sales reps to sell these complex MS offers. Also, by introducing an MS option, the customer selling cycle will most likely elongate—which is death to a sales force driven to close deals as quickly as possible and collect the cash.”
So, the growth of MS is undeniable, as are the tensions within an OEM to resist this foreign object within the OEM host body, and all the white blood cells (traditionally-minded leadership) come out to attack.
And if your organization is now highlighting MS (again), how do you know if it is going to stick this time, or if it is just more lip service?
(Managed) Lip Service: How to Recognize It
In my previous blog, “Managed Services is an Orchestra,” I identified the key cross-functional players that help support a thriving MS practice, including Sales, Marketing, Channels, Theaters, Legal, Services Operations, Engineering, and Executive Leadership. In a perfect world, all of these key players would understand that they were working together in an orchestra and playing off the same sheet of music.
However, if your organization isn’t at least starting to line these players up together behind your MS initiative, they may be just providing lip service support. Here are some ways to tell:
- No MS-specific quota or comp models are defined
- No MS overlay or dedicated sales in place
- MS revenue targets are not defined and owned by regional sales leads
- MS services is always the last, and non-integrated, story in sales pitches to customers
- No MS-specific marketing support leads
- No MS references, case studies, or testimonials are available or planned
- No MS-specific engineering support is in place or it is part of shared engineering support
- No dedicated MS delivery, separate from, and elite to, the rest of service delivery
- MS delivery goals are focused on closing tickets and reducing ticket time rather than customer satisfaction
- Financial model for MS is not agreed upon across the organization
- Lower MS margins than expectations for maintenance or SW are not agreed across the business
- No leadership-wide acknowledgment that growth in MS means early margin pressure - outer years of the contract are always the most profitable
If you have most or all of these in place, congrats! If not, here’s what you should do.
(Managed) Lip Service: What to Do About It
In the immortal words of Douglas Adams from The Hitchhiker’s Guide to Galaxy, “Don’t Panic.”
Your company is in the MS market because customers are demanding it, the market is growing quickly, and opportunities are more abundant in this space than in most other areas of tech.
Leadership comes and goes, but in business, eventually people are going to follow the money. If you are stuck in the middle of a sea of lip service, here are some of the things you can do to stay afloat:
- Get small wins with eager sales associates, customers, and partners and cultivate those wins. Share your success story and amplify the heck out of wins with internal marketing on how the deal was structured, presented, and won. Get the customer to agree to a testimonial and to act as a reference.
- Constantly manage the big picture view upwards, with the goal of getting C-suite buy-in. We’ve shared a lot of resources TSIA has to support the story of the industry shift towards MS on this blog, so be sure to check those out. Be a champion of this story in your organization. Cultivate confederates. Tell your story at every opportunity. Have your leadership work the story up to their leadership. And most importantly, have TSIA come in to help tell this story in your organization.
- Prioritize, focus, and execute. Don’t try to boil the ocean, but instead, improve where you can with what you have. Utilize TSIA’s MS benchmarking program to identify weak spots and prioritize improvement efforts.
- Lastly, don’t stop! You know your customers are demanding this, and you’re in the right place at the right time, even if not everyone is on board with that yet. Change is coming whether they believe it or not, so it’s good to be ready when (not “if”) it happens.
Managed services is at the forefront of change in the tech industry and there should be no surprise that the tip of the spear is first to get scratched.
The secret of change is to focus all your energy not on fighting the old but on building the new.
— Way of the Peaceful Warrior: A Book that Changes Lives, Dan Millman
About the Author
Jeff Connolly is the senior director of managed services research for TSIA. He is a video and telecommunications industry veteran, with over 20 years of experience in managed services and Cloud delivery models. In his role at TSIA, Jeff provides members with fact-based education and insight into the performance and operations of managed services providers of all sizes.