A ServicesRevenue Business Case.

Leaving the CEO’s office following his regular one-on-one meeting, Jim Kemper wondered why he didn’t just resign on the spot! He presented what he thought was a good argument for why it is unrealistic for his boss to expect him to deliver 40% margin in year one. As he staggered back to his office, he replayed in his mind the entire meeting and the arguments he just presented. He was hoping he could catch errors he may have missed.

Six months prior, Jim was named vice president of professional services at Santronics, a $500 million network area storage company. He was lured away from an IT services giant where he ran their most successful consulting practice.

Santronics, like its competitors, is experiencing strong price pressure across its leading hardware products. The company develops and produces storage area networks based on Fiber Channel, a high-speed network storage technology used by some of the world’s largest data centers. A typical product sale averages $50,000. Santronics’ CEO is convinced that lower prices are inevitable if the company were to expand market share. Moreover, a new industry standard, iSCSI (Internet small computer system interface), offers a new, cost-effective solution that addresses significant disadvantages of Fiber Channel, such as limited interoperability among various storage products. Santronics must not only develop new products based on iSCSI, it must also migrate its installed base to those new products or lose them to competitors.

Jim fully understood why his boss looked to professional services to carry the company through the risky transition. Both Jim and his boss were in total agreement that the best way to protect the installed base is through strong, service-based customer relationships. Their disagreement lay in how long Jim had to get to 40% margins. Jim believed he could get there in the second half of Year Two. His boss told him he didn’t have more than a year.

Jim based his first argument on Santronics’ cost structure. He argued that he could probably set high rates for his consultants based on their expertise and knowledge. However, the consultants’ high pay cuts into margins.

The majority of Jim’s team was made up of long-time Santronics engineers. These were among the elite in network area storage. The entire industry had only a few experts at that level. His engineers commanded compensation packages that made Jim think he didn’t negotiate hard enough for a better package for himself. Jim personally interviewed each and every individual in his organization and was impressed with the caliber of technical expertise and dedication to Santronics’ customers. With a few exceptions, Jim knew he had the right people and that they were worth every dollar they earned.

Jim based his second argument on the lack of established methodologies and performance history. He reasoned that to achieve strong margins, a professional services organization must establish solid, repeatable processes and methodologies. These have to be field-tested and measured.
Shortly after his arrival, Jim had asked the leaders of his three practices to send him their practice methodologies. The three practices were Design and Installation Services, Disaster Recovery, and Training. To his surprise, not one of them was able to produce a formal document that described how the practice performed its various projects.

Jim also discovered that the practice leads didn’t consistently track key metrics such as availability and billable hours. Consequently, he spent the first three months on the job implementing a system to track performance metrics. During his one-on-one with his boss, Jim presented the first quarterly performance metrics report.

Jim based his third argument on Santronics’ new and limited services offerings. Prior to accepting his position, Jim learned from those who interviewed him that Santronics had been performing design, installation and other projects for clients at no charge. Product margins used to be high enough to support this practice. Not anymore. Shortly prior to Jim’s arrival, Santronics started to migrate customers to a pay-for-services model out of necessity. Santronics’ senior management team expected strong customer backlash. Many customers did complain, but most went along, and Santronics did not lose a single customer. That’s when management realized they needed a seasoned professional like Jim on board.

Stopping at the coffee station, Jim poured himself a cup of coffee and decided that if anyone can pull this off, it would have to be him.

ServicesRevenue case studies illustrate realistic service marketing or sales situations but do not portray any specific organization. All company and individual names are fictitious.

David Alvarado, Ken Carnes and Diane Sharrock offered their perspective on how to deal with this challenge in ServicesRevenue Volume 1, Issue 1.

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