Monthly Archives: March 2017

The Role of Professional Services in a SaaS Business

Posted on March 19, 2017 | 16 comments

I love to create reductionist mission statements for various departments in a company. These are designed to be ultra-compact and potentially provocative. My two favorite examples thus far:

I like to make them based on real-life situations, e.g., when someone running a department seems confused about the real purpose of their team.

For example, some police-oriented HR departments seem to think their mission is protect employees from management. Think: “Freeze, you can’t send an email like that; put your hands in the air and step away from the keyboard!”

I think otherwise. If the HR team conceptualizes itself as “helping managers manage,” it will be more positively focused, help deliver better results, and be a better business partner — all while protecting employees from bad managers (after all, mistreating employees is bad management).

Over the past year, I’ve developed one of these pithy mission statements for professional services, also known as consulting, the (typically billable) experts employed by a software company who work with customers on implementations after the sale:

Professional services exists to maximize ARR while not losing money.

Maximizing ARR surprises some people. Why say that in the context of professional services? Sales brings in new ARR. Customer Success (or Customers for Life) is reponsible for the maintenance and expansion of existing ARR. Where does professional services fit in? Shouldn’t they exist to drive successful implementations or to achieve services revenue targets? Yes, but that’s actually secondary to the primary mission.

The point of a SaaS business is to maxmize enterprise value and that value is a function of ARR. If you could maximize ARR without a professional services team then you wouldn’t have one at all (and some SaaS firms don’t). But if you’re going to have a professional services team, then they — like everybody else — should be there to maximize ARR. How does professional services help maximize ARR? They:

Help drive new ARR by supporting sales — for example, working with sales to draft a statement of work and by building confidence that the company can solve the customer’s problem. If you remember that customers buy “holes, not bits” you’ll know that a SaaS subscription, by itself, doesn’t solve any business problem. The importance of the consultants who do the solution mapping is paramount.

Help preserve/expand existing ARR by supporting the Customer Success (aka, the Customers for Life) team, either by repairing blown implementations or by doing new or expanded implementations at existing customers. This could entail anything from a “save” to a simple expansion, but either way, professional services is there maximizing ARR.

Help do both by enabling the partner ecosystem. Professional services is key to enabling partners who can both provide quality implementation services for customers and who can extend the vendor’s reach through go-to-market partnering.

Or, as our SVP of Services says, “our role is to make happy customers.”

I prefer to say “maximize ARR without losing money” but we’re very much on the same page. Let’s finish with the “not losing money” part. In my opinion,

A typical on-premises software vendor drove 25% to 30% gross margins on professional services. Those were the days of one big one-shot license fees and huge multi-million dollar implementations. In those days, customers weren’t necessarily too happy but the services team had a strong “make money” aspect to its mission.

A typical SaaS vendor has negative 10% to 20% gross margins on services (and sometimes a lot more negative than that). That’s because some vendors subsidize their ARR with free or heavily discounted services because ARR recurs whereas services do not.

I believe that professional services has real value (e.g., I’ve worked with several amazing services teams) and that if you’re driving 0% to 5% gross margins with such a team that you are already supporting the ARR pool with discounted services (you could be running 25% to 30% margins). Whether you make 0% or 10% doesn’t much matter — because it won’t to someone valuing your company — but I think it’s a mistake to shoot for the 30% margins of yore as well as a mistake to tolerate -50% margins and completely de-value your services.

16 Comments

Posted in HR, Management, Marketing, SaaS, Startups

Tagged Services

10 Questions to Ask Yourself Before Moving into Management

Posted on March 6, 2017 | 8 comments

I went looking for a post to help someone decide if they should move into management, but couldn’t find one that I really loved. These three posts aren’t bad. Nor is this HBR article. But since I couldn’t find a post that I thought nails the spirit of the question, I thought I’d write one myself.

So here are the ten questions you should consider before making a move into management.

1. Do you genuinely care about people?

Far and away this is the most important question because management is all about people. If you don’t enjoy working with people, if you don’t enjoy helping people, or if you’d prefer to be left alone to work on tasks or projects, then do not go into management. If you do not genuinely care about people, then do not go into management.

2. Are you organized?

While a small number of organizational leaders and founders can get away with being unstructured and disorganized, the rest of us in management need to be organized. If you are naturally disorganized, management will be hard for you — and the people who work for you — because your job is to make the plan and coordinate work on it.

This is why one of my managment interview questions is: “if I opened up your kitchen cabinets what would I see?”

3. Are you willing to continuously overcommunicate?

In a world filled with information pollution, constant distractions, and employees who think that they can pay continuous partial attention, you’d be amazed how clearly you need to state things and how often you need to repeat them in order to minimize confusion. A big part of management is communication, so if you don’t like communicating, aren’t good at it, or don’t relish the idea of deliberately and continuously overcommunicating, then don’t go into management.

4. Can you say “No” when you need to do?

Everybody loves yes-people managers except, of course, the people who work for them. While saying yes to the boss and internal customers feels good, you will run your team ragged if you lack the backbone to say no when you need to. If you can’t say no to a bad idea or offer up reprioritization options when the team is red-lining, then don’t go into management. Saying no is an important part of the job.

5. Are you conflict averse?

Several decades I read the book Tough-Minded Management: A Guide for Managers Too Nice for Their Own Good, and it taught me the importance of toughness in management. Management is a tough job. You need to layout objectives and hold people accountable for achieving them. You need to hold peers accountable for delivering on dependencies. You need to give people feedback that they may not want to hear. If you’re conflict averse and loathe the idea of doing these things, don’t go into management. Sadly, conflict averse managers actually generate far more conflict than then non-conflict-averse peers.

6. Do you care more about being liked than being effective?

If you are someone who desperately needs to be liked, then don’t go into management. Managers need to focus on effectiveness. The best way to be liked in management is to not care about being liked. Employees want to be on a winning team that is managed fairly and drives results. Focus on that and your team will like you. If you focus on being liked and want to be everyone’s buddy, you will fail as both buddy and manager.

7. Are you willing to let go?

Everybody knows a micromanager who can’t let go. Nobody likes working for one. Good managers aim to specify what needs to be done without detailing precisely how to do it. Bad managers either over-specify or simply jump in and do it themselves. This causes two problems: they anger the employee whose job it was to perform the task and they abdicate their responsibility to manage the team. If the manager’s doing the employee’s job then whose doing the manager’s? All too often, no one.

8. Do you have thick skin?

Managers make mistakes and managers get criticized. If you can’t handle either, then don’t go into management. Put differently, how many times in your career have your run into your boss’s office and said, “I just want to thank you for the wonderful job you do managing me.” For me, that answer is zero. (I have, however, years later thanked past managers for putting up with my flaws.)

People generally don’t complement their managers; they criticize them. You probably have criticized most of yours. Don’t expect things to be any different once you become the manager.

9. Do you enjoy teaching and coaching?

A huge positive of management is the joy you get from helping people develop their skills and advance in their careers. That joy results from your investment in them with teaching and coaching. Great employees want to be mentored. If you don’t enjoy teaching and coaching, you’ll be cheating your employees out of learning opportunities and cheating yourself out of a valuable part of the management experience.

10. Are you willing to lead?

Managers need not just to manage, but to lead. If stepping up, definining a plan, proposing a solution, or taking an unpopular position scares you, well, part of that is normal, but if you’re not willing to do it anyway, then don’t go into management. Management requires the courage to lead. Remember the Peter Drucker quote that differentiates leadership and management.

“Management is doing things right, leadership is doing the right things.”

As a good manager, you’ll need to do both.

8 Comments

Posted in Culture, Entrepreneurship, Leadership, Management, Startups

Tagged Conflict

The Dogshit Bar: A Memorable Market Research Concept

Posted on March 1, 2017 | 4 comments

I can’t tell you the number of times I’ve seen market research that suffers from one key problem. It goes something like this:

What do you think of PRODUCT’s user interface?
Do you think PRODUCT should be part of suite or a standalone module?
Is the value of PRODUCT best measured per-user or per-bite?
Is the PRODUCT’s functionality best delivered as a native application or via a browser?
Would you like PRODUCT priced per-user or per-consumption?
Rank the importance of features 1-4 in PRODUCT?

The problem is, of course, that you’ve never asked the one question that actually matters — would you buy this product — and are pre-supposing the need for the product and that someone would pay something to fulfill that need.

So try this: substitute “Dogshit Bar” (i.e., a candy bar made of dog shit) for every instance of PRODUCT in one of your market research surveys and see what happens. Very quickly, you’ll realize that you’re asking questions equivalent to:

Should the Dogshit Bar be delivered in a paper or plastic wrapper?
Would you prefer to buy the Dogshit Bar in a 3, 6, or 9 oz size?
Should the Dogshit Bar be priced by ounce or some other metric?

So before drilling into all the details that product management can obsess over, step back, and ask some fundamental questions first.

Does the product solve a problem faced by your organization?

How high a priority is that problem? (Perhaps ranked against a list of high-level priorities for the buyer. It’s not enough that it solves a problem, it needs to solve an important problem.)

What would be the economic value of solving that problem? (That is, how much value can this product provide.)

Would you be willing to pay for it and, if so, how much? (Which starts to factor in not just value but the relative cost of alternative solutions.)

So why do people make this mistake?

I believe there’s some feeling that it’s heretical to ask the basic questions about the startup’s core product or the big company’s new strategic initiatiave that the execs dreamed up at an offsite. While the execs can dream up new product ideas all day long, there’s one thing they can’t do: force people to buy them.

That’s why you need to ask the most basic, fundamental questions in market research first, before proceeding on to analyzing packaging, interface, feature trade-offs, platforms, etc. You can generate lots of data to go analyze about whether people prefer paper or plastic packaging or the 3, 6, or 9 ounce size. But none of it will matter. Because no one’s going to buy a Dogshit Bar.

Now, before wrapping this up, we need to be careful of the Bradley Effect in market research, an important phenomenom in live research (as opposed to anonymous polls) and one of several reasons why pollsters generally called Trump vs. Clinton incorrectly in the 2016 Presidential election.

I’ll apply the Bradley Effect to product research as follows: while there are certain exception categories where people will say they won’t buy something that they will (e.g., pornography), in general:

If someone says they won’t buy something, then they won’t
If someone says they will buy something, then they might

Why? Perhaps they’re trying to be nice. Perhaps they do see some value, but just not enough. Perhaps there is a social stigma associated with saying no.

I first learned about this phenomenom reading Ogivly on Advertising, a classic marketing text by the father of advertising David Ogilvy. Early in his career Ogilvy got lucky and learned an important lesson. While working for George Gallup he was assigned to do polling about a movie entitled Abe Lincoln in Illinois. While the research determined the movie was going to be a roaring success, the film ended up a flop. Why? The participants lied. After all, who wants to sound unpatriotic and tell a pollster that you won’t go see a movie about Abe Lincoln? Here’s a picture of Ogilvy doing that research. Always remember it.