Category Archives: Professional Services

Top Kellblog Posts of 2018

Here’s a quick retrospective on the top Kellblog posts (as measured by views) of 2018.

  • Career Development:  What It Really Means to be a Manager, Director, or VP.  The number two post of 2018 was actually written in 2015!  That says a lot about this very special post which appears to have simply nailed it in capturing the hard-to-describe but incredibly important differences between operating at the manager, director, or VP level.  I must admit I love this post, too, because it was literally twenty years in the making.  I’d been asked so many times “what does it really mean to operate at the director level” that it was cathartic when I finally found the words to express the answer.
  • The SaaS Rule of 40.  No surprise here.  Love it or not, understanding the rule of 40 is critical when running a SaaS business.  Plenty of companies don’t obey the rule of 40 — it’s a very high bar.  And it’s not appropriate in all circumstances.  But something like 80% of public company SaaS market capitalization is captured by the companies that adhere to it.  It’s the PEG ratio of modern SaaS.
  • The Role of Professional Services in a SaaS Company.  I was surprised and happy to see that this post made the top five.  In short, the mission of services in a SaaS company is “to maximize ARR while not losing money.”  SaaS companies don’t need the 25-35% services margins of their on-premises counterparts.   They need happy, renewing customers.  Far better to forgo modest profits on services in favor of subsidizing ARR both in new customer acquisition and in existing customer success to drive renewals.  Services are critical in a SaaS company, but you shouldn’t measure them by services margins.
  • The Customer Acquisition Cost Ratio:  Another Subtle SaaS Metric.  The number five post of 2018 actually dates back to 2013!  The post covers all the basics of measuring your cost to acquire a customer or a $1 of ARR.  In 2019 I intend to update my fundamentals posts on CAC and churn, but until then, this post stands strong in providing a comprehensive view of the CAC ratio and how to calculate it.  Most SaaS companies lose money on customer acquisition (i.e., “sell dollars for 80 cents”) which in turn begs two critical questions:  how much do they lose and how quickly do they get it back?  I’m happy to see a “fun with fundamentals” type post still running in the top five.

Notes

[1]  See disclaimer that I’m not a financial analyst and I don’t make buy/sell recommendations.

[2] Broadly defined.  I know they’re in Utah.

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:

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.