IT spending is approaching $4 trillion worldwide, and 45% of this spending goes to services as oppose to hardware (38%) and software (17%). These services fall into three main categories, and are often provided by the same supplier:
Professional Services – You contract with a vendor to perform a specific deliverable such as consulting, application system integration, infrastructure systems integration to handle a project-based or time-based event such as cloud implementations and ERP implementations.
Staff Augmentation – You supplement your staff with outside resources based on demand such as application development, technical operations work managed by your organization and your policies.
Managed Services – You move a portion of your work in its entirety to a supplier for a defined time period with agreed-upon service level.
The way organizations approach services sales will differ widely from the sales of hardware and software. IT service sales reps are adept at creating “franchises” within your organization that enable them to continually grow revenue. It’s essential to understand supplier strategy so you can establish governance and control the services spend area. This will ensure that services are cost-competitive, and also ensure that you maintain leverage in your relationships with the service providers all the way through the sales and engagement process.
Services sales generally consist of two very distinct types of salespeople. Most new customer sales pursuits are led by “hunters”, who thrive on pursuing and closing new logo customers. This is a high risk, high reward position that is best suited to personalities that thrive on the challenge and often higher commissioned new logo sale. Once hunters open a new account, they often will turn it over to someone who is better suited to manage and nurture a customer or what is sometimes referred to as a “farmer”.
Farmers are “slow and steady wins the race” personality type, intent on building long-term relationships to harvest growth opportunities across their firm’s entire service portfolio. Their goal is to leverage a beachhead in a new customer and expand revenue from there. Successful farmers develop deep ties and insight into the customer’s enterprise over long periods of time. In fact, it’s not unusual to have this kind of sales rep on an account for five or more years.
Farmers are often compensated beyond just “top line” revenue and into “profitable growth”. It’s not unusual for farming salespeople to have quotas with a 20% annual growth rate including profit improvement. This results in them constantly planting seeds to grow future revenue and continue to reach this target. These reps are also often rewarded for pipeline and portfolio depth within their compensation plans to help motivate and drive the consistent and long term business relationship associated with a franchised customer.
What makes the services sales process so challenging for customers to control is that it’s a “team sport” in that often the various resources that are delivering services at a client also have a role to play in the process. It’s not unusual for a Service Delivery Manager, Project Manager or Consultant, who become integrated into your IT team delivering services, to also have a portion of their variable compensation driven by customer profitable revenue growth. Because so many members of a service provider are walking the halls of your organization, enjoying unencumbered access, they are able to expand relationships and gather valuable information on upcoming projects, organizational dynamics and competitive dynamics. They in turn feed this information to the sales rep who uses it to build detailed account plans and sales strategies to grow revenue. This situation makes things very difficult for the services buyer – you might be able to shut down access to the sales rep, but it’s impossible to shut down access to the services delivery team.
To help drive and manage this activity, services sales teams look at a customer’s business as a portfolio of opportunities and look to expand their “share of a client’s wallet” through detailed planning and analysis on what additional services they could sell now and in the future. In this process, they analyze each potential service or project and what is required to pursue and close this new business. This includes any services which are currently being performed by competitors, as well as services that may be on a client’s technology or business roadmap. To the supplier, its all about capturing more wallet share of your IT budget, and they’ll do whatever they can to find out where those services contracts are, when they’re coming due, and if you’re happy with the way things are going or if they can persuade you to switch supplier.
Anatomy of a Project: Workday Implementation
To better understand how the services sales process works over a period of several years, the following is a real life case study from one of our clients: Through a competitive bid process, a customer awarded a $3M project to one of the industry’s top system integrators to implement Workday in its organization, and the initial contract called for Core HCM, Payroll, Benefits and Time Tracking. As often happens, after the planning phase of implementation, the client realized that they also needed Change Management added to the project’s scope, resulting in a $300K change order. As the project continued, the client was unable to perform their contractual obligations due to lack of staff or skill sets. This slowed down the project and meant it would require more time, and therefore more change orders, resulting in $175K additional costs. Both of these change orders were obviously not competed and thus were very profitable for the service provider.
After the core Workday platform was implemented, the client determined that there were additional modules they wanted to purchase from Workday– Recruiting, Performance Management – and these incremental projects went to the same systems integration vendor (adding $400K in additional project revenue). A few years later, Workday made a change to its platform and the service provider was asked to rewrite an integration connection with another platform ($65K more). Lastly, when the client needed a supplier to assist them with ongoing support of the Workday platform, they naturally turned to the system integration vendor, who knew their instance the best.
Over the period of the multi-year contract, the services supplier’s revenue grew significantly, as did their margins. We inspected the engagement and mapped how it happened. The initial contract was a competitively bid with an RFP, came in at a reasonable price compared to like-sized projects, and the service providers’ margins were modest. But as the initial contract added scope, change orders, incremental projects, and ongoing support, the deals became progressively less competitive and the margins more profitable. Because of the imbedded relationship, the supplier was well-positioned to take on the added scope, build wallet share and charge high prices. This is a microcosm of what happens in in the IT services world.
Best Practices to Optimize Spend
To help clients get a handle on service spends, we offer the following recommendations:
Understand the supplier’s playbook and use it to drive internal alignment to get more value from suppliers.
Pay close attention to what motivates your sales rep, what they’re trying to achieve and how they plan to do it.
Establish strict governance and vendor management processes focused on controlling the supplier’s “franchise” in your organization.
Guard against supplier entanglement in your Statement of Work (SOW). These must be written with the highest level of detail and cover tooling poison pills, areas of responsibilities, scope creep, change orders, termination and so forth, to avoid trouble down the road. You have to think of these things at the get go – what happens if we have an economic downturn like we’re experiencing right now? Can I get out of this? Is my contract flexible enough to accommodate change?
Make your suppliers compete for your business. Use multiple vendors that are eager for each other’s business. This creates uncertainty around deals, creates leverage for the buyer and helps keep margins down. Use an RFP process whenever possible.
Chris Powers, Managing Partner, and Jim Faletra, Managing Director, lead the ClearEdge Professional Services and Outsourcing Practice.