In Episode 12 Building a Services Business, the focus is on what it takes to add a services revenue and profitability stream from the ground up to your existing product-based business to diversify offerings, create a reoccurring revenue, improve profitability and EBDITA.
Today’s guest Mike O’Neil has led sales and services organizations, working both domestically and internationally. He has 20 years dedicated to services businesses in a variety of leadership roles as well as the extensive leading product and sales organizations from international financial institutions, and Telecom companies to small business. As a recognized expert in his field, Mike has taught at the university level to prepare the next generation of business leaders and founders.
In addition to the interview above there are expanded and additional answers throughout the responses below. In particular, insurance and KPI has questions not covered in the audio. Mike also produced “Why Services Needs to Be Part of Your Business” that was designed to help business owners and leaders consider the impact of adding services to their portfolio.
Assume that a company wants to diversify its product sales by adding services to their offers. What are the top 3 things the leadership needs to think about?
The first thing I believe a company should think about when considering starting a service business to complement and existing product business is this. What is the driving force within your business that you believe is addressed by adding a service mix to your offerings? Is there a gap in the channel that needs to be filled by you delivering these services? Is the need coming from your customer base, requesting that you offer services? What competition would you be facing?
Second, you should build a financial model to help you evaluate your services plan. You need to consider the cost of entry (major or minor investment), your timeline from plan to go live, including your break-even point. Can your business handle the cash outlay with no incoming revenue? What is the desired profit margin you are expecting? I recommend you put together a reasonable service sales forecast for your first year as well as speak to some of your best customers to determine their interest in your offering. Does the vendor support you by delivering your own services? Will they drive service business to you and away from their own PS delivery?
Third, take a hard look at your timeline. If it takes 9 to 12 months to go live, will the opportunity you see today still be there? Will it have been met by your competition or is the demand still there? These 3 criteria should be critical in helping you make an informed and well thought out decision.
When businesses evolve there is nearly always downward price pressure on hardware, software, and physical goods. Do you see those same concerns with services offerings in a Business to the Business environment?
Downward pricing pressure can be an aspect of the services business depending on the services you are offering. For example, if you are offering a service that is considered a commodity because many businesses offer the service, you will see downward pricing pressure. This has driven many services businesses to outsource the low end, lower margin services to focus on the complex, higher-margin services. An example of this in the I/T industry is the racking and stacking of I/T equipment.
For complex services like break-fix, customer care, application support, etc., the margins remain higher as there are fewer companies capable of delivering these services. The product vendors also limit the number of companies that can be certified to provide service on their products thereby limiting the amount of competition in the marketplace.
Are services sales a one and done type of business? Or can they create a recurring revenue stream? (Follow up) How would you begin to model that?
There are both types of service offerings, one and done, and recurring revenue. Many products that are sold require some kind of installation. If this install is not free from the vendor, there is usually a one-time installation fee. This is the one and done revenue stream and a key part of any professional services strategy.
After the installation, most products have a warranty period, followed by a maintenance contract (break/fix). It is usually sold as a 1 to 3 year contract, sometimes longer, and includes some version of a customer support center where you can call or e-mail for support. The support is delivered via phone or email and is considered a level 1 support. If the problem is complex, it may require higher level support including on-site service.
This is the recurring revenue stream that services businesses want, and they strive to deliver service excellence to ensure the maintenance contract is renewed before expiration. It also helps to keep the competition out of your account.
A good model for generating both one and done and recurring revenue is to sell a total solution to the customer at the time of your product sale. If you can offer your customer the product, the installation, and the ongoing maintenance, you have a model for generating one time and recurring revenue. The catch is that you have to deliver service excellence in order to keep the customer.
Most businesses carry insurance already. If you start sending people on-site to visit customers does that require additional licenses or insurance?
Yes, there is additional insurance required by the service provider. There is insurance on their employees who are working on a customer site in case of an accident.
The service provider should provide a COI Certificate of Insurance. The policy includes Commercial General Liability and Workers Compensation for a single project or for a specific timeframe. The coverage is set “per occurrence limit”, usually for $1M or “general aggregate limit”, usually $2M.
Most clients insist on the service provider having insurance for their on-site employees.
Talent and Recruiting in any business are key. Are there different considerations for these employees and their skillsets?
Yes. The engineers that provide professional services require a different skillset than sales support engineers. Installation and break/fix engineers require a level of product knowledge above the general product specs. They are required to know how to install the equipment, integrate it with existing equipment, troubleshoot problems and install both hardware and software fixes, and coordinate with the product vendors when level 3 support is required. These individuals are required to take a specific vendor or partner provided training and to attain a vendor certification. The training is both classroom and hands-on labs. The more technical the product, the more training is required.
Service engineers are driven by the following.
- Desire to work on complex problems and continue to grow their skills on existing and new technology
- Achieving technical expertise and certifications
- Attending new training and technical conferences each year
- Problem-solving and customer satisfaction
- Accessibility to a lab of current technology
- A level of autonomy in doing their jobs
- Ability to collaborate with other technical engineers
Depending on the level of skilled engineer that you are hiring, salary is also an important criteria. You can offset a requirement for a higher salary by offering a total package that includes some of the drivers mentioned previously.
If you are building a services team, it helps to have a mix of experienced engineers as well as new engineers. This way you save on resource costs and enable on the job training for new engineers.
Can you give me a few ideas of metrics a new services business could use to ensure customer satisfaction?
There are a number of KPI’s that I have used to ensure customer satisfaction. These include but are not limited to the following.
- Work completed on-time and with minimal or no disruption to the client
- SLA Fulfillment (response times)
- Customer Satisfaction surveys, both internal and external
- First call problem resolution
- Total time to problem resolution
- Follow-up call to close the problem with the customer
- New or additional services sales to existing customers
- Renewal rates on break fix contracts
In addition to the above KPI’s focused on customer satisfaction, there are several business based KPI’s that give you data on how well you are performing. A few of these KPI’s are:
- Your customer satisfaction scores
- Your % of wins verses Quotes generated
- Repeat business from past services contracts
- Attainment of revenue and profit goals
- Cost expenditures are per plan (staff, training, equipment)
- Utilization (billable vs non-billable engineering hours
In order to be successful in the services business, you need continuous monitoring and reporting to ensure you are delivering what you committed and delivering results to the business.