Category Archives: HR

The Role of Professional Services in a SaaS Business

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:

Professsional 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.

You Can Never Fire Someone Too Early

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.

Career Development:  What It Really Means to be a Manager, Director, or VP

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” which is the creation of a set of granular levels to classify jobs across the organization.  Leveling typically looks like this

level

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) for employee fairness and retention, I think classical leveling has a number of problems.

  • It is 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 for 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 separately 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 do I need to do make L10” when you want to say “I want a $10K raise.”  I can’t tell you the number of times I’ve had people ask 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 deliver 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 0.

I’m 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 and get approval of that plan, then go execute it.

The biggest single development issue I’ve seen over the years is that many VPs still think like directors. [1]

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 on them).

Of course, the VP got approval to execute then 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, he or she is 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 for a plan he and the team agreed to 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, he/she 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.  That is, an executive should never make or 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 later for poor execution.  The former is a far better way to go than the latter.

This is important not only because it prepares the VP to be  CEO one day, but also because it empowers the VP in marking his/her 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 VP’s think.

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Footnotes:

[1] 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.