The Re- Emergence of Managed Services: Capitalizing on the Cloud

The Re- Emergence of Managed Services: Capitalizing on the Cloud Perspective by Waterstone Management Group Dhaval Moogimane, Partner Neil Jain, Partner Andrew Clark, Manager January 2014

The Re- Emergence of Managed Services: Capitalizing on the Cloud Introduction It just might be the greatest comeback ever. After the heyday of the ASP model in the 1990 s, Managed Services (MS) is re- emerging as a top priority for many technology companies. A perfect storm of customer demand, technology and cloud maturity, and increased competitive pressure have put Managed Services back in the spotlight. TSIA has confirmed this trend through its recent research. In B4B, the book published in October, TSIA asserts that technology companies must evolve their offerings to provide Level 3 and Level 4 services many of which have elements of a Managed Service. To remain relevant in the marketplace, technology companies must move beyond traditional implementation and support services. Making a comeback is not easy, and this is especially true for Managed Services. Based on Waterstone s market observations and recent client experiences, technology companies are repeatedly running into substantial challenges as they design, launch, and scale Managed Services offerings. What follows is a synopsis of why Managed Services are relevant now and key considerations for any Managed Services executive. What are Managed Services? At the highest level, a Managed Service is any service where a 3 rd party takes over the day- to- day management of a technology on behalf of a customer. Within the tech industry, there are many flavors of managed services and different examples by type of technology managed. For example, a hardware vendor may manage IT infrastructure (e.g., servers, routers) remotely; a B2C software business may provide anti- virus protection or cloud backup services for desktops. For many technology vendors, MS can be stepping stone to the cloud, providing the XaaS value proposition without having to re- engineer their core product. The example below illustrates this dynamic in the in the context of Enterprise Software:

Why Managed Services? Hardware and software companies are constantly facing pressure from customers to increase the value their products deliver, and to deliver a quicker return on investment. Offering managed services is one way technology companies can meet these challenges. A well- developed MS offering can provide clear benefit to both the technology vendor and the customer. The table below illustrates a few key benefits to each party. Benefits to Technology Company offering Managed Services Closer relationship with each customer ongoing, everyday communication, partnership approach; the relationship is stickier and the customer is less likely to switch to a rival Increased understanding of being in the customer s shoes by actually managing the system they have developed, the technology company can evolve its marketing approach in future sales Informed product roadmap by seeing first hand how the system performs, the technology company can focus on fixing critical issues and developing most requested features to aid overall product quality Enhanced opportunities for additional PS revenue - over the lifetime of the implementation, the vendor is likely the first port of call for upgrades and enhancements Benefits to Managed Services User Lower upfront IT costs the vendor makes the initial investment Predictable IT expense a standard fee is agreed between user and vendor for all services within certain agreed parameters Better system performance and usability managed by experts in that piece of technology, dedicated to ensuring high uptime and enhanced performance Peace of mind no need to worry about staffing, training and managing application support team Faster time to value the user can focus on making the system solve their business issues, rather than figuring out how it works first Why Now? Given the benefits, one might ask why Managed Services now as opposed to several years ago. The answer lies in a unique convergence of market, customer, competitive, and technology trends that are creating a ripe environment today: 1. Source of Growth: Technology providers are seeking new revenue sources to offset slowing growth of core products; MS provide a faster- growing revenue stream; in the Enterprise Software space, for example, IDC predicts that Managed Services revenues will grow faster (8%) than traditional application software (6%) over the next 5 years. 2. Customer Demand: Customers are increasingly asking for managed and hosted options as they look to accelerate time to value, reduce upfront costs, and shift to an asset- lite infrastructure. Skilled IT resources are expensive, and difficult to retain in- house.

3. XaaS Defense: Cloud alternatives are pressuring incumbents, forcing them to react. Managed Services can provide similar value proposition to XaaS, but without the need to completely re- engineer the product. Managed Services can provide a starting point for incumbents to move toward a cloud- enabled model and act as a logical step along the cloud continuum. 4. Technology Maturity: Technology evolution is enabling a greater set of Managed Services capabilities, in terms of remote connectivity, product serviceability, and associated delivery cost. For example, CIOs have a greater level of comfort in the concept of remote management of applications, and many of the key security implications are now much better understood. Key Considerations for Managed Services Executives While the prospect of new MS offerings has many potential upsides, technology companies must nevertheless exercise caution as they approach the opportunity. MS is a substantially different type of business compared to a traditional product or services business. At its heart, it requires a change in orientation - from a transactional mind- set to one of continuous service delivery. The economics of a MS business are very different, and suitable expectations must be set early on. For example, margins for MS businesses in enterprise software companies typically range 25-35%, considerably lower from their traditional license, maintenance and professional services revenue, but provide a new recurring revenue steam and source of growth from existing customers. Technology companies should thoughtfully design the key operating model elements of a MS business to successfully run at scale. Waterstone has had the opportunity to assist a number of clients through this journey, and have identified four principal operating elements that are critical to launching and running a successful Managed Services business: 1. Clearly defined Offering Portfolio Managed Services offerings need to be well defined and packaged, with a clear entitlement list and pricing basis. 2. Specialized Go- to- market Model Selling Managed Services involves a different sales cycle, different buyers, and more consultative approach than selling tradition product. 3. Integrated Service Delivery Delivery requires coordination across a number of internal teams and development of new capabilities (e.g. hosting) in order to ensure an even and integrated customer experience. 4. Dedicated P&L Business Management To treat Managed Services as a significant business in its own right, it should be established as a separate P&L, with an overall owner accountable for financial and operational performance. On the following page, each of these four operating elements is broken out into detailed checklist components, together with example considerations as you tackle each one.

1. Offering Portfolio Managed Services Checklist & Example Considerations Offer definition Customization Pricing basis Pricing policy and price list Clear definition of what is and isn t included in the offer Included/excluded items across a range of topics: Modules, Upgrades, Application/System management tasks, Infrastructure environment, Support and SLAs, Security and Disaster recovery Shift to standard Specified policy for customization outside of standard offering Relevant usage and volume metrics that can be calculated and monitored, e.g., by user, by environment, by transaction, by hour, by GB stored, etc. Price tier triggers VSOE considerations Full delivery cost appraisal 2. Go- to- market Sales Specialists Target accounts and segments Education of Field Sales Sales enablement tools Sales incentives Experts in underlying product and the concepts of a Managed Services implementation Trigger analysis of likely targets, e.g. Customers on older versions, customers with low existing customization Managed Services FAQ Differences in Managed Services implementation process Offering collateral Pricing templates Description of deployment process TCO / ROI calculators Realignment to give equivalence between traditional and Managed Services sale 3. Service Delivery Professional Services implementation approach Management Services Delivery Data Center Customer Support model Relationship Specialists Revised methodology to integrate with MS deals Dedicated team with expertise in Managed Services implementation Decision to build or partner Infrastructure expertise (typically doesn t exist in- house) Lights out operations Single support gateway for all types of MS issues Integrated support model traditional products Dedicated to ongoing customer satisfaction Special responsibility for renewal 4. P&L Business Management Executive owner Separate P&L Performance Management Deal Review Billing Owner assigned to overall business with control over operating aspects of the business Separate reporting Charge- back of services delivered elsewhere as appropriate Key metrics identified specific to the business (e.g., average ACV/TCV, uptime, renewals) Managed Services- specific dashboards Regular cadence to review and drive pipeline Process and policy to mitigate risk (e.g., approvals on size of deal, geographies, customization, discounting, etc.) Usage tracking Regular invoicing process

Change Program In Waterstone s experience, evolving a business quickly across these four areas can be a considerable challenge. Many of the items outlined on the checklist are cross- functional, will likely be a change to the organization, and will need to be established and/or customized to be specific to the nuances of the MS offerings. We recommend that management teams take a programmatic approach to launch, drive action and track progress when evolving a MS business. While the specific activities will vary based on the maturity of the business (as illustrated in the figure below), the need for cross- functional coordination and issue resolution will persist. Ideation Design Launch Scale Assess Managed Services relevance to customer segments Design portfolio based on market need and technically suitability of products Develop vision and key size/growth targets for Managed Services business Gain executive alignment and commitment on the opportunity Detail out offers (entitlements, pricing) and standardize Design the key operating model processes to execute Go- to- Market, Service Delivery and Operational Outline evolved process flows across the organization Hire key Managed Services roles required to successfully launch and scale the business (Sales, Implementation, Support, Application Management) Engage select test clients and installations to pilot the processes Review issues and enhance processes and documentation based on feedback Generate market buzz industry events, analysts, and customer focus groups Review and prioritize technical gaps in remainder of product portfolio Standardize delivery processes and infrastructure Set target percentage of new business delivered through Managed Services Summary Waterstone believes that Managed Services present a significant opportunity to technology companies wishing to deepen customer relationships and enhance the perceived customer value; customers are increasingly interested and knowledgeable about Managed Services and the concept and technology is mature and well understood. As technology executives design and scale any Managed Services business, they should focus on the following four elements, underpinned with a programmatic approach to manage activity: (1) Clear definition of the Managed Services offerings; (2) Development of a specialized Go- to- market framework and operation; (3) Building an integrated, expert Services Delivery function; and (4) Separate P&L Business Management

To learn more about how Waterstone Management Group can help your company to improve its Professional Services and Managed Services practices to grow new revenue streams or improve current business performance, please contact: Dhaval Moogimane, Partner Email: dmooigmane@waterstonegroup.com Phone: +1-877- 603-1113 Dhaval brings over 18 years of business management and consulting experience that blends business strategy development, operations and IT. He brings in- depth expertise in the enterprise software, information services, technology device and professional services industry. He specializes in helping technology companies capitalize on emerging trends, drive growth, and transform from a product led to solutions- centric business. He works at the intersection of business and technology in areas of growth strategy, operating model transformation, new offering launch, operations improvement and offshore/outsourcing execution. Prior to joining Waterstone, Dhaval was an Associate Partner at IBM Business Consulting Services, and part of the corporate development and strategy team responsible for IBM s services business. He has an undergraduate degree in Electrical Engineering from Mumbai University, and an MBA in Finance and Strategy from Indiana University, Bloomington Neil Jain, Partner Email: njain@waterstonegroup.com Phone: +1-877- 603-1113 Neil brings more than 15 years of experience formulating growth strategies and improving operations for technology companies. At Waterstone, Neil has successfully led a number of client engagements across the software, hardware, and telecom segments with businesses that range from emerging high- growth companies to the Fortune 100. Neil s recent client work has been primarily focused on enterprise software companies, with a focus on evolution to cloud- based business models, improvement of professional services and support functions, and acquisition- related diligence and integration. Prior to joining Waterstone, Neil held roles at Firefly Mobile, NAVTEQ (acquired by Nokia), the Strategy & Change practice within IBM Business Consulting Services and as a software engineer with the Cellular Infrastructure Group at Motorola. Neil holds an MBA from the University of Chicago Booth School of Business and a Bachelor of Science in Computer Science from Cornell University. Andrew Clark, Manager Email: aclark@waterstonegroup.com Phone: +1-877- 603-1113 Andrew brings 7 years of operations management experience and 3 years of strategy consulting experience across a range of technology and telecoms clients. At Waterstone, Andrew s client work has focused on new product development, customer insights, services strategy and the cloud. Prior to joining Waterstone, Andrew was part of the European operations leadership team at Barclays Bank and Lehman Brothers, and was responsible for developing the systems, processes, controls and resourcing for a range of equity linked products. Andrew holds an MBA from the University of Chicago Booth School of Business and a Bachelor of Science in Management from Warwick Business School in the UK. For more information, please visit www.waterstonegroup.com