Making Applications Managed Services work

Making Applications Managed Services work

A Revenue Rocket perspective by CEO Mike Harvath

Mike Harvath - Revenue RocketThis month we are going to be talking about Applications Managed Services. It was the topic of the presentation we gave at the Microsoft Worldwide Partners Conference in Houston in July. The feedback we received indicated AMS is very much top-of-mind. If it’s not, it should be. This is the next wonderfully profitable frontier for IT services firms targeting the small and mid-market space.

We are talking about Applications Managed Services and NOT Infrastructure Managed Services. The distinction between the two is akin to the distinction between the skeletal system (i.e. Infrastructure) and the circulatory, nervous, respiratory, etc organ systems (i.e. Applications) that make up the human anatomy.

As much as the organ systems are the lifeblood of the human anatomy, Applications are the lifeblood of the corporate anatomy. Keeping this lifeblood nourished, protected and maintained is where corporate America is throwing buckets of money. It’s also one of the areas of the business mix that corporate executives are eager to outsource, and this spells opportunity for IT services firms that earn the right to this responsibility.

The numbers for the growth of Applications Managed Services are compelling. A benchmark study by the research firm Nemertes found that 63% of organizations in 2008 plan to use some form of managed services, up from 46% in 2007. The primary reasons, according to a study by Bell Canada, are shrinking IT and networking budgets (44%) and the growing complexity of IT and networking infrastructures (22%). The preferred solutions are outsourcing and managed services.

Outsourcing is the magical elixir that corporate executives have embraced, as it allows them to focus on doing what they do best by redirecting certain of their business functions to others to do what they do best.

Applications Managed Services is the magical elixir that IT services executives have to embrace to benefit from this trend. Being the best at Applications Managed Services is a surefire path to growth and profitability. In our June newsletter we revealed how IT services executives can become the best at what they do so they can win the trust and confidence of companies looking to outsource. In a word, it’s specialization.

Doing this right is a boon for you and your clients. For you, it’s the prospect of higher earnings through new revenue derived by having the specialized expertise that allows you to attract those companies whose benefit is higher earnings derived by reducing costs associated with practices not in their core competency.

So, how do IT services firms go about winning in Applications Managed Services? Read on, then please give me a call at 952-835-2333 or contact me at mharvath@revenuerocket.com.

Value Outsourcing and Value Managed Services: What is it, and what can we learn from it?

Some time ago we came across an interesting article in the Minneapolis Star Tribune written by Isaac Cheifetz, the newspaper’s Business and Technology Trends columnist.

Mr. Cheifetz was ruminating about Warren Buffet’s “value investing” philosophy at the time he was writing a piece on outsourcing. In a spark of insight, he recognized that the Oracle of Omaha’s philosophy on value investing could be applied to outsourcing from a corporate point of view, or what he came to call “value outsourcing.”

Now, in our own spark of insight, we take this Buffet/Cheifetz philosophy one step farther and apply it to managed services from an IT services perspective, in what we’ll call “value managed services.”

We’ve segmented five tenets of this philosophy. First, we offer Buffet’s philosophy on value investing; second, Cheifetz’s interpretation for corporate outsourcing; and last our interpretation for IT services firms.

TENET ONE

Buffet on value investing

  • Invest in businesses you understand. Focus on the business fundamentals of straightforward industries.

Cheifetz on value outsourcing

  • Understand it, then outsource it. Outsource only functions whose processes you understand. Outsourcers do something you can do, only more efficiently, because of a special focus or economies of scale.

Revenue Rocket on value managed services

  • Specialization is the route to the razor-sharp focus that gives customers and prospects the confidence that you have the expertise to do more efficiently what they can’t do or choose not to do.

TENET TWO

Buffet on value investing

  • Analyze the fundamentals. Make investment decisions on the underlying long-term performance of the company, not short-term trends or indicators.

Cheifetz on value outsourcing

  • If you can’t measure it, don’t outsource it. Evaluate the total cost of the function, whether done internally or outside. Avoid the temptation of using the cost savings of outsourcing to avoid the hard work of process optimization.

Revenue Rocket on value managed services

  • Manage to the metrics. If it can’t be measured it can’t be managed, so make certain that you have both the internal and external metrics in place to insure consistent delivery. Give us a call for a list of the Metrics That Matter.

TENET THREE

Buffet on value investing

  • Buy at a significant discount. No matter how rigorous your value assessment, there will always be unforseen complications.

Cheifetz on value outsourcing

  • Don’t outsource for the sake of change Like any useful management innovation, outsourcing can be a valuable tool or a thoughtless substitute for strategic action. If you are going to outsource based on cost efficiencies, there should be substantial savings involved—along with a sizable margin of error as a hedge against the unexpected.

Revenue Rocket on value managed services

  • Excel at delivery. When IT services firm deliver what they promise, on-time and on-budget, the win rate for new projects from current customers is 80%. The key to delivery excellence is having trained delivery consultants, a quality assurance program and project incentives.

TENET FOUR

Buffet on value investing

  • Invest for the long-term. A good company, bought at a favorable price, will continue appreciating in value.

Cheifetz on value outsourcing

  • Outsource strategically, not tactically. There should be a market-driven strategy for outsourcing. Also plan to retain control of functions that harbor critical information. An outsourcer is responsible only for satisfying a SLA, nothing more.

Revenue Rocket on value managed services

  • Embrace the Full Lifecycle Services Model. Build your AMS business around the three-legged stool of Advisory Services, Technical Consulting and Maintenance and Support that the market is demanding.

TENET FIVE

Buffet on value investing

  • Bet on people. Focus on the executive team and corporate culture. An owner/manager is more likely to focus on long-term profitability rather than short-term manipulation of financial performance.

Cheifetz on value outsourcing

  • Bet on people. Make sure you have sophisticated executives planning and negotiating your outsourcing agreements. Outsourcers make their profits by negotiating complex agreements with contract changes for additional or reduced resource requirements.

Revenue Rocket on value managed services

  • Bet on people. Make sure your people know how to craft profitable Service Level Agreements, which are vastly different than the standard time and material based agreements. Poorly constructed SLAs can be deleterious to your delivery model and your financial health. We can help construct the right kinds of SLA’s.

Just what is the value of Applications Managed Services to you and your clients? The numbers are impressive.

  • For your clients: They can be looking at a 10%-15% savings in year one and up to 50% of the maintenance spend over 7 years.

  • For IT services firms: You can be looking at gross margins of 65%+ and an increase in your valuation by as much as 25%.

How can you tell where you are in the battle for Applications Managed Services?

When you look, as we did, to how companies stack up in their readiness to take advantage of the trend in AMS you quickly categorize IT services firms in one of three broad classifications.

Take a look at some of the more telling metrics to find out whether you are a Market Leader, Follower or Laggard in the fight for AMS, what your goals should be and what the risks of failing look like staying where you are.

Classification Metrics Market Leader Market Follower Market Laggard
Degree of specialization Market & technology focus Technical focus & multiple location generalist 100% technical focus
Market Rank/Presence # 1 or #2 in their markets One of many with a technical expertise Market and technical generalist
Revenue Allocation Advisory Services 20%
Technical services 50%
App. Managed Services 30%
Advisory Services < 10%
Technical Services 80%
App. Managed Services <10%
AFAB: Anything for a buck.
Goals Increase App. Managed Services to 40% Get specialized and increase App. Managed Services revenue Move to Follower classification
Going out-of-business risk Less than 5% 30% 60%
How can you tell if you're specialized enough to win in Applications Managed Services?

We call it the Rule of Thirds.

It’s the litmus test that we’ve experienced for IT services firms with a finely-honed, well-crafted and specialized business model, and it goes like this:

  1. Prospect meeting rate.
    Specialized firms should get in to meet with at least one-third of the prospects who have been screened and qualified.

  2. Prospect proposal rate.
    Specialized firms should get invited to submit a proposal to at least one-third of the prospects with whom they meet.

  3. Prospect close rate.
    Specialized firms should close the sale on at least one-third of the proposals they present.

If you meet or exceed the Rule of Thirds, then you should be in good shape to be a leader in the battle for Applications Managed Services. If not, then you have your work cut out for you, as you’ll likely find yourself in one of two other catch-up classifications.

What will it take to build your Application Managed Services business?

Right off the bat, you’ll have to know that it’s not an insignificant investment getting an AMS operation up and running.

Unlike the traditional route to professional services in which you can sell ahead and then hire to the opportunities, in application managed services you’ll have to start with a much higher fixed cost. The service has to be in place at the point-of-sale, because once you sell it, it’ll be too late to build the infrastructure. In our experience, the cost of this investment is in the neighborhood of 2.5% of your revenue to model this program over a 6-month period. It’s another 5% of revenue to staff the program and roll it out the first year. It’ll take 6 months of planning and 1 year of implementation to get the business unit rolling and profitable. That’s the hard news.

The easier news to swallow is that once you get this up and running, you can reasonably expect a 1 year ROI once the unit is profitable, after which you can realize gross margin contributions for your AMS offerings to be about 15% higher than your core offerings, which is why the attraction is there.

We have a pretty good handle on the mechanics of building an AMS offering, and a thorough grasp of the issues with which you’ll have to contend. Oddly, for us, that’s the easy part. Where we find ourselves working the hardest is acting as an AMS lightning rod, getting executives to catch this trend at this early stage. We see too many executives seduced by the short-term appeal of low-hanging fruit who have not yet committed themselves to giving AMS the priority it deserves.

There are, however, companies like Pariveda Solutions that see the potential, and who are applying the resources to get a head start on what they envision will be a major revenue generator for them.

A conversation with Bruce Ballengee, CEO of Pariveda Solutions, Inc.

Bruce Ballengee - Revenue RocketThis month, we’re pleased to present a conversation with Bruce Ballengee, CEO of Pariveda Solutions, a Dallas-based information technology services company ranked by Inc. Magazine as the 14th fastest growing IT services firm nationally.

What’s your background, and how did you get started?

I studied economics and finance at the University of Chicago with an eye to a career in banking. While interviewing with a number of banks, I also met with Arthur Andersen for a position in their Management Information Consulting Division. I was skeptical at first, meeting with a technology services company; after all, I trained as a banker. Well, they convinced me that they could teach me everything I needed to know about technology. I was intrigued, and saw this as a phenomenal growth opportunity.

After ten years with what eventually became Accenture, I left for a short stint and then came back as CTO of a software company that was acquired by Accenture, where I met my better half at work, our co-founder John Humphrey. Later, we were both at a small IT services firm that was acquired by Hitachi Consulting. It was at this time of serial acquisitions by Hitachi that we met many of the people with whom we started Pariveda.

What’s been driving your success?

Our customers are impressed not only with our technical delivery skills, but they also appreciate that we have a good understanding of how business and technology fit together. We have a good track record of relationship selling, tapping into both our existing client base as well as our networks. We tend not to be in the RFP business … we don’t do many of these. Because we don’t chase RFP’s and rely primarily on our network, our rate of business coming in is slower, but it’s steadier because it tends to be economic insensitive and it comes with a higher win rate.

What’s your outlook for 2009?

We are cautiously optimistic. We’ll end this year up about 60%. For 2009, we’re looking for a stretch goal of 50% growth, though if we grow 20%-30% based on what people are saying about the economy in 2009, we’ll declare it a good year. We will invest to start the year on the 20%-30% path and then hopefully adjust investment upward based on performance. One thing that has insulated us is that we’ve done very little work in the financial services and construction industries.

What are the challenges that you see facing your customers, and what does this mean to you?

I think executives have to worry about the same thing they’ve been worrying about for the last 35 years, and that is aligning the IT organization with the business. While IT is more and more an integral part of the business process, it’s not necessarily helping companies from an alignment perspective. Business technology problems tend to be complex, with the parties taking sides based on their perspectives. We find we can help bridge the gap, often with a different perspective or ‘third way.’

The other thing businesses have to worry about is that in 2009 they are likely to face pressure to cut IT spending. What we advise clients is that cutting IT spending, which is typically 2%-3% of gross revenue, does less for them than spending their IT money more wisely. They should be thinking, how I can use IT to make my salespeople more effective? Or, in the face of rising fuel costs, how I can use automation to make our field personnel more productive? There are a lot of opportunities out there, and if you understand their cost and revenue drivers, you can make a pretty persuasive case that there are things that they should be spending money on and maybe they need to cut somewhere else to find it or nor at all.

Where are you going with Applications Managed Services?

I think the long term trend for AMS is good for IT services firms. In recessionary times companies cut IT spending, particularly their permanent IT personnel. The theory is that they can add these people back later, but in the long run they’ll just have project managers who will manage outsourced work. Every time they make these cuts it’s hard to get IT people back, so the long-term trend to outsource is accelerated. This has been particularly true if you look at IT employment and unemployment data trends since 2000. The demand is still there, which means the work goes to service providers.

AMS for us right now is about 5% of revenue, but we’re getting more calls for this service from our clients, and of course, Revenue Rocket is counseling us to listen to our customers in this regard. We’re looking at building our AMS business to 20% over the next few years. The benefits we’re seeing are a more predictable revenue stream and a more effective way of developing people. Working inside an organization represents a tremendous opportunity for growth and learning and accelerating the technical capabilities of Pariveda. The end result is that we’ll do a better job for our clients and be better evangelists for Pariveda.

We’re finding the keys to making this work is that you have to give AMS the attention it deserves internally. You have to make a serious commitment in terms of money, resources and talent; which is exactly what we are doing.

You can contact Bruce via email, or visit Pariveda Solutions at www.parivedasolutions.com.



X