Giving a successful People update at board meetings
Scorecards and the infamous “it’s all green” story
How to tell if the CPO is helping (hint: ask)
The episode is available on the ParkerGale site, Apple Podcasts, and Spotify. For those interested, my first appearance — a romp that contrasts the PE and VC worlds with my old friend Jim Milbery — is available here.
I’ve worked with several startups that fell into the following pattern:
Selling a SaaS application at a healthy price (e.g., $100K to $200K ARR)
With low, fixed-cost implementation packages (e.g., $25K)
But a product that actually takes maybe $50K to $75K to successfully deploy
Resulting in an unprofitable professional services business (and wrecking the market for partner services)
High adoption failure
And, depending on the initial contract duration, high customer churn 
For example, one company had a CAC of 4.0, churn of 25%, and services margins of negative 66% when I started working with them . Ouch.
Before proceeding, let me say that if you have a low-touch, high-velocity, easy-adoption business model — and the product to go with it — then you don’t need to read this post . If you don’t, and any of the above problems sound familiar, then let’s figure out what’s going on here and fix it.
The problem is the company is not charging the appropriate price for the services needed. Perhaps this is because of a zero-sum fallacy between ARR and services. Or perhaps they feel that customers “just won’t pay” that much for implementation services. Or perhaps their product takes more work to deploy than the competition and they feel forced to match price on services .
This under-pricing usually triggers a number of other problems:
In order to work within the self-created, low-cost implementation services model, the company “hires cheap” when it comes to implementation consultants, preferring junior staff and/or staff in offshore locations.
The company’s “implementation consultants” are overloaded, working on too many projects in parallel, and are largely focused more on “getting onto the next one” than getting customers successfully implemented.
Once a certain number of hours are clocked on any given project, the consultants go from “in a hurry” to “in a big hurry” to finish up and move on.
Customers are left high-and-dry with failed or partial implementations that, if left unfinished, will likely lead to churn.
Customer success, whose job is to prevent churn, is left holding the bag and is pulled away from its primary mission of adoption, renewal, and expansion into the implementation-completion business, potentially changing its hiring profile from more sales-oriented to more product-oriented and/or complementing CSMs with customer success architects (CSAs) or technical account managers (TAMs) to try and fill the implementation void.
I sometimes consider fixing this corporate chiropractor work, because one maladjustment results in the whole organization being twisted out of shape . The good news is that, as with chiropractors, one adjustment can pop the whole system back into alignment.
Now, before we move onto fixing this, there’s one more problem we haven’t discussed yet — and give yourself ten pats on the back if you figured out before I got here:
Who ever said the customer defined success as getting the software implemented?
Oh shit. We were so tied up trying to deliver a $25K services package that costs $40K to deliver that we forgot about the customer. What customer equates implementation with success? None. Zero. Nobody.
“Hey, it’s all set up now, you can login, gotta go!” is not the credo of a success-oriented consultant.
But what do we call our consultants again? Implementation consultants.
What do implementation consultants think they do? Well, implementations.
When an implementation consultant reads their own business card, what does it tell them they their job is? Implementations.
Are implementations what customers want? No.
So why do we have implementation consultants again? I have no idea.
What do customers what? Overall they want success, but what’s a good proxy? How about attaining their first business objective? If you sell:
A recruiting app, running your first recruiting campaign
A financial planning app, it’s making your first plan
A demandgen marketing app, it’s running your first demandgen campaign
A customer service app, it’s your first day running the call center
A deflection app, it’s deflecting your first cases
A sales enablement app, it’s training your first reps
An IT support app, it’s handing your first tickets
So, what’s the fix here? While not all of this will be possible or recommended in all situations, here’s the long list:
Re-frame services as in the success business, not the implementation business
Eliminate the job title implementation consultant in favor of consultant
Get services to make plans that end not with implementation, but with the achievement of an agreed-to first business objective.
Hire more experienced consultants who can better make customers successful and don’t be afraid to charge more for them. (They’re worth it.)
Agree to an ARR price before negotiating the services price; refuse to trade one off against the other.
Involve your services team in the sale well before the contract is signed so they propose the right prix fixe package (e.g., small, medium, large) or create an appropriately-sized bespoke statement of work.
Modify your product so it is not at a competitive disadvantage on required implementation work.
# # #
 With one-year contracts, a failed implementation that takes 6-9 months to fail typically results in churn, whereas with three-year contracts, you will often get another swing at the problem.
 These horrific unit economics result in an LTV/CAC of 1.0 and make the company totally uninvestable. The CAC would be even higher if hard-ass investor added the services losses back into the CAC on the theory they were subsidizing sales.
 Product-led growth business models are great, but when companies that are not designed for them try to emulate pieces of the business model, they can get into trouble. Implementation is an area that quickly goes awry when companies not built for PLG attempt bottom-up, try-and-buy, viral go-to market strategies.
 In which case, an obvious solution is to reduce the deployment workload requirements of the product.
 Put differently, the sales bone is connected to the services bone, and the services bone is connected to the customer success bone.
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 at Host Analytics 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 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 vendors have negative 20% to negative 10% 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 revenue does not.
I believe that professional services has real value (e.g., our team at Host Analytics is amazing) 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.
The first time I heard the VC adage “you can never fire someone too early,” it rubbed me the wrong way. It sounded harsh and unfeeling. It seemed flippant. It felt trite. It seemed, frankly, like one of those things people say in the press box, but never on the playing field.
But slowly, as with most VC adages, I found the truth in it. Once you dismiss the initial tendency to rebuff it for its harshness, and try to really understand what it means, it’s hard to disagree with.
So what does it mean?
As an executive, by the time you find out there’s a problem, there has already been considerable damage done and you need to fix it right away to prevent more damage.
As an executive there will always be a time lag between when coworkers know there is a problem and you learn there is one. Respect for hierarchy and politesse are just two things that delay signal transmission. Rationalization, conflict avoidance, and denial are three others.
As the hiring manager you will tend to rationalize away problems because you hired the person. Firing them would show a concrete mistake on your part and put you in the position of having to make a re-hire. Deep down, you are rooting for individual-X to succeed and that biases your perspective and delays your decision.
You want a team of stars and superstars. If you are even considering terminating someone it means, definitionally, they are not a star or superstar. Ergo, you should not want them on your team. This is a tough one to internalize, but it’s true. Harsh as it may sound, the mere act of questioning whether you should terminate someone means that you probably should.
People who have known about the problem longer than you have are waiting and watching. How long will you tolerate the behavior? What does that mean about standards of competence you set? How many subordinates will respond to recruiter calls while you figure this out? And because your learning of the problem is definitionally phase-lagged, people may have been waiting quite a while. You may have lost some already.
Empirically, when you ask seasoned managers about this topic, virtually everyone says that they never fired someone too early, but have often done so too late. “Hire slow, fire fast” as the other hiring adage goes.
It’s no secret that I’m not a fan of big-company HR practices. I’m more of the First Break all the Rules type. Despite my general skepticism of many standard practices, we still do annual performance reviews at my company, though I’m thinking seriously of dropping them. (See Get Rid of the Performance Review.)
Another practice I’m not hugely fond of is “leveling” — the creation of a set of granular levels to classify jobs across the organization. Leveling typically results in something that looks like this:
While I am a huge fan of compensation benchmarking (i.e., figuring out what someone is worth in the market before they do by getting another job), I think classical leveling has a number of problems:
It’s futile to level across functions. Yes, you might discover that a Senior FPA Analyst II earns the same as a Product Marketing Director I, but why does that matter? It’s a coincidence. It’s like saying with $3.65 I can buy either a grande non-fat latte or a head of organic lettuce. What matters is the fair price of each of those goods in the market — not they that happen to have the same price. So I object to the whole notion of levels across the organization. It’s not canonical; it’s coincidence.
Most leveling systems are too granular, with the levels separated by arbitrary characterizations. It’s makework. It’s fake science. It’s bureaucratic and encourages a non-thinking “climb the ladder” approach to career development. (“Hey, let’s develop you to go from somewhat-independent to rather-independent this year.”)
It conflates career development and salary negotiation. It encourages a mindset of saying, “what must I do to make L10” when you want to say, “I want a $10K raise.” I can’t tell you the number of times people have asked me for “development” or “leveling” conversations where I get excited and start talking about learning, skills gaps, and such and it’s clear all they wanted to talk about was salary. Disappointing.
That said, I do believe there are three meaningful levels in management and it’s important to understand the differences among them. I can’t tell you the number of times someone has sincerely asked me, “what does it take to be a director?” or, “how can I develop myself into a VP?”
It’s a hard question. You can turn to the leveling system for an answer, but it’s not in there. For years, in fact, I’ve struggled to find what I consider to be a good answer to the question.
I’m not talking about Senior VP vs. Executive VP or Director vs. Senior Director. I view such adjectives as window dressing or stripes: important recognition along the way, but nothing that fundamentally changes one’s level.
I’m not talking about how many people you manage. In call centers, a director might manage 500 people. In startups, a VP might manage zero.
I am talking about one of three levels at which people operate: manager, director, and vice president. Here are my definitions:
Managers are paid to drive results with some support. They have experience in the function, can take responsibility, but are still learning the job and will have questions and need support. They can execute the tactical plan for a project but typically can’t make it.
Directors are paid to drive results with little or no supervision (“set and forget”). Directors know how to do the job. They can make a project’s tactical plan in their sleep. They can work across the organization to get it done. I love strong directors. They get shit done.
VPs are paid to make the plan. Say you run marketing. Your job is to understand the company’s business situation, make a plan to address it, build consensus to get approval of that plan, and then go execute it.
The biggest single development issue I’ve seen over the years is that many VPs still think like directors. 
Say the plan didn’t work. “But, we executed the plan we agreed to,” they might say, hoping to play a get-out-of-jail-free card with the CEO (which is about to boomerang).
Of course, the VP got approval to execute the plan. Otherwise, you’d be having a different conversation, one about termination for insubordination.
But the plan didn’t work. Because directors are primarily execution engines, they can successfully play this card. Fair enough. Good directors challenge their plans to make them better. But they can still play the approval card successfully because their primary duty is to execute the plan, not make it.
VP’s, however, cannot play the approval card. The VP’s job is to get the right answer. They are the functional expert. No one on the team knows their function better than they do. And even if someone did, they are still playing the VP of function role and it’s their job – and no one else’s — to get the right answer.
Now, you might be thinking, “glad I don’t work for Dave” right now — he’s putting failure of a plan to which he and the team agreed on the back of the VP. And I am.
But it’s the same standard to which the CEO is held. If the CEO makes a plan, gets it approved by the board, and executes it well but it doesn’t work, they cannot tell the board “but, but, it’s the plan we agreed to.” Most CEOs wouldn’t even dream of saying that. It’s because CEOs understand they are held accountable not for effort or activity, but results.
Part of truly operating at the VP level is to internalize this fact. You are accountable for results. Make a plan that you believe in. Because if the plan doesn’t work, you can’t hide behind approval. Your job was to make a plan that worked. If the risk of dying on a hill is inevitable, you may as well die on your own hill, and not someone else’s.
Paraphrasing the ancient Fram oil filter commercial, I call this “you can fire me now or fire me later” principle. An executive should never sign up for a plan they don’t believe in. They should risk being fired now for refusing to sign up for the plan (e.g., challenging assumptions, delivering bad news) as opposed to halfheartedly executing a plan they don’t believe in and almost certainly getting fired for its failure later. The former is a far better way to go than the latter.
This is important not only because it prepares the VP to one day become a CEO, but also because it empowers the VP in making their plan. If this my plan, if I am to be judged on its success or failure, if I am not able to use approval as a get-out-of-jail-free card, then is it the right plan?
That’s the thinking I want to stimulate. That’s how great VPs think.
# # #
 Since big companies throw around the VP title pretty casually, this post is arguing that many of those VPs are actually directors in thinking and accountability. This may be one reason why big company VPs have trouble adapting to the e-staff of startups.
I’m Dave Kellogg, advisor, director, consultant, angel investor, and blogger focused on enterprise software startups.
I bring an uncommon perspective to startup challenges having 10 years’ experience at each of the CEO, CMO, and independent director levels across 10+ companies ranging in size from zero to over $1B in revenues.
From 2012 to 2018, I was CEO of cloud EPM vendor Host Analytics, where we quintupled ARR while halving customer acquisition costs in a competitive market, ultimately selling the company in a private equity transaction.
Previously, I was SVP/GM of the $500M Service Cloud business at Salesforce; CEO of NoSQL database provider MarkLogic, which we grew from zero to $80M over 6 years; and CMO at Business Objects for nearly a decade as we grew from $30M to over $1B in revenues. I started my career in technical and product marketing positions at Ingres and Versant.
I love disruption, startups, and Silicon Valley and have had the pleasure of working in varied capacities with companies including Bluecore, Cyral, FloQast, GainSight, MongoDB, Recorded Future, and Tableau.
I previously sat on the boards of Granular (agtech, acquired by DuPont), Aster Data (big data, acquired by Teradata), and Nuxeo (content services, acquired by Hyland), and Profisee (MDM, exited to Pamlico).
I periodically speak to strategy and entrepreneurship classes at the Haas School of Business (UC Berkeley) and Hautes Études Commerciales de Paris (HEC).