SERVICE INSIGHT. Framing Managed Services DEFINING MANAGED SERVICES. by Thomas Lah, Executive Director, TSIA

Transcription

1 SERVICE INSIGHT EDUCATION SERVICES FIELD SERVICES PROFESSIONAL SERVICES SERVICE REVENUE GENERATION SUPPORT SERVICES TSIA-SI July 24, 2012 Framing Managed Services by Thomas Lah, Executive Director, TSIA Every year TSIA benchmarks the growth rate of service revenues in over one hundred major technology companies. From this data, we know three things: For some original equipment manufacturers (OEMs), managed services has already become a core source of revenue and profits. For other OEMs, managed services is a new offer and currently not a large percentage of revenue. On average, managed services is the fastest growing service line for hardware and software companies that have established support and professional services businesses. So managed services is becoming an ever more important component of the economic engine for OEMs. The real challenge is to truly understand what is actually in this fast-growing service line. This Services Insight is designed to accomplish three goals: 1. Provide a clear definition of what services technology companies are including under the umbrella of managed services. 2. Establish why managed services will become a critical service line for all product companies. 3. Provide a framework that can enable meaningful benchmarking in the area of managed services. Besides primary research conducted by TSIA on this topic, the content in this paper is based on conversations and interviews TSIA has been conducting with member companies on the topic of managed services. We would like to thank all of the managed services experts that took the time to provide their perspectives. DEFINING MANAGED SERVICES TSIA currently benchmarks the following technology service lines: Support Services. Centralized call center environments supporting a technology. Field Services. Services designed to fix or maintain technology implemented on the customer site. Professional Services. Project-based services designed to implement and integrate technology. Education Services. Services designed to train customers on how to use a technology.

2 2 When TSIA established these service disciplines, there was not much debate. Technology companies were pretty clear what types of service offers belonged within each of these service lines. Figure 1: The TSIA Services Continuum However, when you see the term managed services, what types of services come to mind? What types of services does your company include under the umbrella of managed services? Let s review some realworld industry examples. TSIA member Dell lists the following service offerings under the banner of managed services: 1 Data Center Managed Services Reallocate IT resources from day-to-day maintenance and operational support to innovation and strategic activities with Dell s package cost-effective Data Center Managed Services. Data Center IT Outsourcing Reclaim your resources and optimize IT performance by offloading your data center infrastructure management with Dell s custom Data Center IT Outsourcing Services. End User Managed Services Free up resources, improve productivity and ensure superior service levels by offloading management of your end user infrastructure to Dell. Asset Management Configuration & Deployment Onsite Services Service Desk

3 3 Telecom Expense Management Simplify telecom carrier management as well as inventory, usage, rate and contract management with Dell Telecom Expense Management. So right out of the gate, we have a company using the word outsourcing when describing a managed service. Siemens Enterprise Communications is another TSIA member that offers managed services. One of their managed service offerings is titled Hosted Products. In this category, Siemens offers to provide hosted unified communication capabilities that others can resell to end customers. 2 So now, managed services can include hosted technology. TSIA member NCR provides Management Service. One offer in this category is titled Hosting and ecommerce Services. NCR states: Hosted applications and Software as a Service (SaaS) models transform your business by lowering costs, accelerating deployment and increasing efficiencies, while still meeting your requirements for high application availability and IT security. Expenses are shifted from higher cost, upfront capital expenses, to lower cost hosted system implementations. New applications are quickly deployed, and infrastructure and personnel costs are reduced. 3 NCR is not the only company that includes SaaS offerings under the umbrella of managed services. My, how the plot quickly thickens. In 2008, TSIA conducted a baseline benchmark on the managed services businesses being run by some of our members. In the survey, we asked the following question: Which of the following describe the fundamental nature of your MS business? As the data clearly shows in Figure 2, managed services means different things to different companies.

4 4 Figure 2: Nature of Managed Services Which of the following describe the fundamental nature or purpose of your MS business? (All the apply.) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 23% 77% 31% 69% 54% 54% 46% 46% 69% 31% 77% 23% No Yes On-Site Mgmt. Remote Mgmt. SaaS Hosted App IT Mgmt. Other And of course, there are long-term, multiyear managed service contracts crafted by large OEMs like HP, Philips, and Xerox. These are contracts that can include business process optimization, facilities management, and outsourcing of departments. When the dust settles, the terms of these deals are unique from customer to customer. Where does this leave us? How can we create a meaningful working definition for this amorphous service line? After speaking with numerous companies and reviewing how the industry currently uses the term managed services, TSIA has concluded that this is the first services line to be best defined by offering types. There are four distinct managed service offering types that exist in the marketplace: Offering Type A. Provide services designed to help operate some or all of a technology environment. Offering Type B. Provide services designed to improve how technology is being owned or operated to create business value. Offering Type C. Host the technology for the customer by either renting access to the asset or by selling the asset and charging a fee to host it remotely.

5 5 Offering Type D. A highly customized contract which bundles many products and services into a single, long-term agreement where the customer pays for the bundle either by the month, based on usage, on an at-risk/pay-for-performance basis, or a combination. Every company TSIA interviewed could place their current managed services offerings into one of these four offering types. Table 1 provides a summary of each type and provides examples that exist in the marketplace today. Table 1: Managed Service Offering Types Services Provided Value Proposition Observations Industry Examples A Paid to Operate: Provide services designed to help operate a technology environment. Reduce staffing costs. Reduce costs to maintain technology. Could be delivering services remotely or on site. OEMs typically start as this type of MS provider. Dell Data Center Managed Services. B Paid to Optimize: Provide services designed to improve technology adoption. Increase the business value realized from having a technology in place. Buyer is typically not IT but a business unit. Flexera Software License Reconciliation and Optimization Service. C Paid to Host: Host the technology or own the technology for the customer. Reduce capital costs. Sometimes: No upfront cost: only pay for value realized. Includes companies that are providing hosted technology or own the technology that is in place on the customer site. The end game for mature and hyper-competitive technology markets is when the OEM no longer sells technology standalone, but only bundled within a managed service. Siemens Enterprise Hosted UC Platform. Demandware on-demand e-commerce. D Paid to Simplify: Provide complex array of services bundled into a multiyear deal designed to reduce business complexity for the customer. Reduce business complexity. Reduce long-term operational costs. Increase operational efficiencies. Contracts are complex and unique. Providers start with building block service capabilities and then assemble them into a contract that meets the customer s business objectives. Xerox Managed Print Services. Cubic Corporation Managed Transportation Services. Contracts may contain risk- or gain-sharing components.

6 6 This exploration into managed services has forced TSIA to refresh its Services Continuum diagram. This is a one-page diagram that summarizes the various service lines that can exist within a product company. Figure 3 shows the refreshed Services Continuum. In this new view, TSIA is placing all the service offerings that operate technology, offer hosted technology, or support long-term value realization into a Managed Services and Outsourcing Services category. Figure 3: TSIA Services Continuum WHY MANAGED SERVICES WILL BE CRITICAL TO ALL PRODUCT COMPANIES Managed services offerings from technology companies have existed for decades. This is clearly not a new concept. Why, now, is managed services emerging as a high-growth and strategic service line for product companies? There are three trends in the consumption of technology that are amplifying the importance of managed services: 1. Desire to reduce IT complexity. 2. Commoditization of product capabilities. 3. Consumption-based pricing models. Reducing Complexity Not so long ago, technical capabilities and complexity helped win business for product companies. As TSIA documented in Complexity Avalanche, 4 customers have been overwhelmed by more technical capabilities then they can successfully consume. Now, IT departments are being tasked to simplify their environments. Cloud-based offerings are allowing IT departments to reduce technical complexity by exiting the business of spinning up their own data centers. Now, these same IT departments are looking

7 7 for ways to reduce operational complexity. They are turning to their technology vendors for services designed to help operate and optimize technology environments (on-site or remote). While conducting the interviews for this Service Insight, TSIA heard from multiple members regarding how customers are requesting an OEM take responsibility for specific parts of the technology environment. This trend of decomposing operational responsibility to multiple best-in-class OEMs seems to be an emerging trend. And, thanks to new technology capabilities, OEMs can provide many of these managed services remotely without needing to ramp up and deploy an army of on-site staff. Figure 4 summarizes these trends. OEMs are in a unique position to offer Type A, B, or C managed services that reduce complexity for customers. Figure 4: Reducing Complexity for Customers Commoditization Another trend impacting the rise of managed services is the commoditization of the product offering. Customers are not willing to pay premium prices for functionality they feel has become commonplace. To maintain revenues and margins, product companies are forced to create value propositions that extend beyond feature functionality. The transition of printer companies migrating from simply selling commoditized printers to offering managed print services is a classic example. This relentless trend of product commoditization continues its trek through the IT industry. As product margins flatline, new service bundles are brought to life. Note: TSIA believes product companies must not simply pursue Type A and Type C managed service offerings that are designed to reduce the operating costs for customers. The outsourcing mantra of your mess for less is a race to the bottom of the margin pool. OEMs must strive to identify Type B managed

8 8 service offerings that are designed to help customers realize business value. These Type B offerings will be the key to both differentiation and higher service margins. Consumption-Based Pricing Models The third trend that is accelerating the growth of managed services is Consumption Economics. In 2011, TSIA published a book titled Consumption Economics: The New Rules of Tech. 5 This book outlines the dramatic shift in how companies are consuming technology. The old model of paying up front for technology that may never deliver the business value promised is under duress. Enterprises are much more interested in paying for what they actually use. TSIA member companies now have customers requesting new pricing models pricing models where the technology is offered as a service, and the customer only pays for what they are using. When faced with these customer requests, product companies are responding with new managed service offerings. Managed services is quickly becoming the bucket where product companies dump all of their emerging offerings that do not neatly fit into existing product or service lines. For many product companies, managed services is where Consumption Economics meets new business model. Note: One of the greatest challenges created by consumption-based pricing models for legacy product companies is how to transition revenue recognition models. Managed services is becoming the financial plug where the new revenue models are being established. Complexity, commoditization, and Consumption Economics are all conspiring to place managed services at the epicenter of future revenue growth for technology providers. This reality will lead more and more product companies to ask questions like, How fast can I profitably grow a managed services business? and How do I maximize my margins in managed services? To answer these questions, product companies will need to thoroughly understand the practices and performance metrics of the MS service line. To accelerate that understanding, companies can leverage the tactic of industry benchmarking. FRAMEWORK FOR BENCHMARKING MANAGED SERVICES Now that we have established a definition for managed services and why managed services is a critical services discipline to study, we can move to the next task at hand: actually benchmarking and analyzing the performance of this service line. However, if the managed services category actually contains four distinct types of offerings, how can companies benchmark this service line in a meaningful way? To answer this question, let s review what we have learned over the years from benchmarking other service lines.

9 9 Establishing Meaningful Peer Groups When a company benchmarks the performance of a service line with TSIA, this is the first question they rightfully ask: Who am I benchmarking against? In other words, the company wants to understand if their practices and performance metrics are being compared to other companies that are like them. Otherwise, benchmarking does not make much sense. When you think of the task of identifying like companies, what attributes do you feel are relevant? Over the years, service leaders have told us the following parameters matter when establishing relevant peer groups for benchmarking embedded service lines: 1. Size of the service business. 2. How long the service business has been in existence. 3. What type of product the service business supports (hardware, software, SaaS, storage, servers, printers). 4. What type of market the company serves (enterprise, consumer, medical, telecom, etc.). In addition to these key attributes, TSIA has found the following attributes also greatly influence the practices and performance metrics of an embedded services business: 5. The percentage of total company revenues coming from the service line. 6. The charter of the service line (product sales enablement vs. services profitability). 7. Status as a profit center (vs. being a cost center). Using these seven attributes, TSIA establishes relevant peer groups for embedded technology service businesses to benchmark performance. If eight or more companies in a TSIA benchmark database meet the criteria for a specific peer group, TSIA can publish the practices and performance metrics for that peer group. When benchmarking, TSIA compares the practices and results of a member company to relevant peer groups to identify critical gaps in performance and business practices. For a detailed example of the TSIA benchmarking methodology in practice, read Benchmarking Technology Professional Services. Now, what peer groups will be relevant in the world of managed services? Establishing Meaningful Peer Groups in Managed Services TSIA believes the above seven attributes will be relevant when benchmarking the practices and performance metrics of embedded managed services organizations. However, TSIA believes there will be three additional attributes that will be critical when establishing relevant peer groups:

10 10 8. Offer Types. When managed services leaders compare their performance to other managed services organizations, they will need to understand what types of managed service offers are in play (i.e., A, B, C, D, or a combination of the four). The practices and financial performance of an MS business that has a specialized Type B offering will be different from an MS business that has a Type C offering that involves hosting technology for the customer. 9. Delivery Profile. Managed services can be delivered remotely or at the customer site. For services delivered remotely, those resource pools can be dedicated to specific customer accounts or shared across multiple accounts. These delivery parameters will be important to understand when comparing both service business practices and performance metrics. 10. Pricing Model. Finally, the pricing model(s) supported by the managed services business will influence practices and performance. In the world of professional services, there has been a slow migration from time-and-materials pricing to fixed pricing. This transition has influenced some of the business practices within PS. Managed services businesses with consumption-based pricing models will have year one and year two financial metrics that look different than MS businesses that sign customers to annual contracts based on flat rates. How will TSIA establish meaningful peer groups for benchmarking the complex world of managed services? By standing up peer groups segmented in various ways by these ten key attributes. Table 2 provides an example of some of the peer groups that TSIA may quickly be able to establish as member companies benchmark their MS businesses with TSIA. Table 2: Potential Peer Groups in Managed Services Company Type Offering Type(s) Delivery Model Dedicated or Shared Resource Pool Pricing Model MS Revenues Software Type A Remote Shared Monthly, Annual ALL ALL Type B Remote Shared Monthly, Annual <$50M ALL Type C On-Site N/A N/A ALL ALL Type C Remote N/A Usage or Value Realized Hardware Type C On-Site Dedicated Monthly, Annual >$50M PUTTING IT ALL TOGETHER Managed services has become a catch-all bucket in the world of technology offerings. Yet, it is a catch-all bucket that will soon be overflowing with more and more revenues. One TSIA member that currently receives a majority of their revenue from large hardware product transactions expects large portions of revenue to shift into managed services over the next five years. TSIA believes this will be a common trend for many member companies. As more and more revenue moves into managed services,

11 11 companies will need to understand the realities of optimizing this service line. And the questions will come fast and furious:how fast can you grow a Type C, on-site MS business? How many customers does it take before a Type B, remotely delivered MS business is profitable? What are the highest margins companies are experiencing in any MS business? What practices drive higher MS margins? What are the common practices to limit liability in MS contracts? What renewal rate is common for MS contracts? The questions will keep coming. TSIA has a platform designed to help answer these questions. We can t wait to get started ,901rb Wood, J.B Complexity Avalanche: Overcoming the Threat to Technology Adoption. San Diego: Point B, Inc. 5 Wood, J.B., Todd Hewlin, and Thomas Lah Consumption Economics: The New Rules of Tech. San Diego: Point B, Inc.