Managed Services Summit

Thomas Lah, TSIAMay 10th , 2012

Agenda3:00-3:30 p.m.

Introduction and Overview of TSIA Research on Managed Services

Thomas Lah, Executive Director, TSIA

 

3:30-4:15 p.m.

Lessons Learned from a Career in Building Managed Services Businesses

George Humphrey, Director Global Strategy, Managed Services, Avaya

 

4:15-4:45 p.m.

Managed Services Critical Information Needs

Group Discussion

 

4:45-5:00 p.m.

Next Steps

J.B. Wood, President and CEO, TSIA

2

3

TSIA COVERAGE:

Five Major Service Disciplines

Strategy Engineering Finance Marketing Operations Sales Staffing Technology

SS FS PS SRGSupportServices

FieldServices

ProfessionalServices

Service RevenueGeneration

ESEducationServices

W W W . T S I A . C O M

MSManagedServices

2012 PS Research Activities

Public Financial Data

Service Line Benchmarking

Topical Studies

Case Studies and

Peer Networking

4

Comparison 1: Benchmarking Practices

5

Req

uir

ed

P

ract

ice

Your Practice

Peer Group

Majority Practice

Industry Majority Practice

Yes = Good

Yes = Better

In Alignment?

No = Worse

No = Bad

Comparison 2: Practice “Zones”

Practices are business processes that help companies achieve target results.

6

PacesetterPractice

Reasonable Practice

Common

Practice

Recommended Practice

Required Practice

+/- 10% of Avg“On Target”

Average

Off Target(High)

Off Target(Low)

Metrics/Results Zones

7

Important Exceptions

• Results or metrics that are off target relative to both the industry and peers, but in a clearly positive way are rated as “differentiated” (Ex: extremely high project margins)

• Key metrics or results that are off target relative to both the industry and peers and in a clearly negative way are rated as “critical off target” (extremely low project margins)

Metrics are analytical measurements intended to quantify the state of a business. They are independent variables or leading indicators for the performance of a PS business. Examples are attach rates, billable utilization, and project duration

Results are analytical measurements intended to

quantify the state of a business. These are

dependent variables or lagging indicators for the

performance of a PS business. Results are

produced by practices and metrics. Examples are

project margin, field margin and net operating income.

Evaluation Framework

Each self-reported practice was compared to the majority practices of the industry and the target peer group

On target industry practices were worth 3 points; on target peer group practices were worth 5 points

Each self-reported metric and result was compared to the average metrics and results of the industry and the target peer group

On target or better industry metrics and results were worth 3 points; on target peer metrics and results were worth 5 points

Differentiated practices/metrics: points taken off the table Missing of off target critical practices/metrics: points doubled Scores are expressed as % of total possible points and assigned color coding as

follows: 0% - 24%: RED 25% - 49%: ORANGE 50% - 74%: OLIVE 75% - 100%: GREEN

8

Putting It All Together: An Example

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Overall Rating

(Points divided by total possible)Practice or Metric

Missing or Off Target(Possible points unchanged)

DifferentiatedMetric or Practice(Points taken off the table)

CRITICAL Practice or Metric Missing or Off

Target(Possible points doubled)

Service Line Dashboards

10

Services Continuum

Software as Service

Managed Services

Paid to Operate

Support Services

Paid to support remotely

Field Services

Paid to support onsite

Education

Paid to teach

Professional

Services

Paid to Implement and

Integrate

Outsourcing

Paid to own

Management

Consulting

Paid to advise

The Services Continuum

Technology Intensive

Human Capital Intensive

Parameters of Managed Services

12

Hosted On PremOff Prem

Location: How are the services delivered?

Ownership: Who owns the hardware, software?

Group DiscussionHow do you define “Managed Services?”

Managed Service Offerings Votes

Manage (but don’t own) on premise technology with on premise resources

10

Remotely manage technology and processes 18

Hosted software or hardware capabilities 15

Own the technology, processes ,and people on behalf of the customer (IaaS)

7

13

Where Managed Services Lives

14

Who Owns Managed Service Offerings Votes

Support Services

Professional Services

Managed Services

Other

Managed Services Research

Thomas Lah| TSIA

2008 TSIA Research StudySection Items %1. Company and TPS Demographics 8 6.6%2. Managed Services BU Profile 19 15.6%3. Managed Services Business Model/Results 15 12.3%4. Sales Practices 10 8.2%5. Delivery Practices 3 2.5%6. Engineering Practices 9 7.4%7. Marketing Practices 7 5.7%8. CRM Practices 5 4.1%9. Operations Practices 8 6.6%10. Partner Management Practices and Results 8 6.6%11. Economic Impact Practices and Results 6 4.9%12. Contract Practices and Results 24 19.7%

Total 122 100%

16

Charter and Organization

Managed Services BU Role

62%

15% 15%8%

0%

10%

20%

30%

40%

50%

60%

70%

Semi-IndependentBU

Cross-ServiceOffering

PS Offering Independent BU

62%: “Managed Services is a semi-independent business unit with tight integration to another services line of business (e.g., CS or PS)”

17

15%

62%15%

Organization: Who has primary responsibility for management of the managed services function?

Sales Executive

C-LevelExecutive

Professional Services

Channels

Pre-SalesEng.

Field Services

TechnicalServices

Education

CustomerSupport

ManagedServices Exec

Services Executive

18

Core Functions

•Onsite management of customer systems and applications that may include actually owning the systems

•Remote management of customer systems and applications

•Software-a- a-Service (SaaS)—license and environment provided in one offering

•Hosted application support —customer buys software license separately, managed service provides application environment

•The management of IT related processes for the customer (capacity planning, adds/moves/changes)

19

Core Functions

Which of the following describe the fundamental nature or purpose of your MS business?

(All that apply)

77% 69%46% 46% 31% 23%

23% 31%54% 54% 69% 77%

0%

20%

40%

60%

80%

100%

OnsiteMgt

RemoteMgt

SaaS HostedApp

IT Mgt Other

No

Yes

20

Process areas

In what process areas does your Managed Services business currently operate?(Please select all that apply)

· Infrastructure management· Business integration· Application or application life cycle management· IT service management· Desktop management· Server management· Network management· CIO or Strategic assessment· Security management· Back-up or recovery services· Support Services· Other

21

Core FunctionsIn what process areas does your MS business operate?

8%

15%

31%

31%

31%

31%

38%

46%

46%

46%

54%

77%

92%

85%

69%

69%

69%

69%

62%

54%

54%

54%

46%

23%

0% 20% 40% 60% 80% 100%

DT Mgt

Bus Int

Server Mgt

Network Mgt

CIO Assess

Sec Mgt

Suppor Svcs

ALCM

ITSM

Other

Back-up Svcs

Infrast Mgt

Yes No

22

Managed Services BU Basics

Parameter Low Avg High

MS Annual Revenue ($M) $4 $403 $2,100

MS % of Total Revenue 1% 8.6% 53%

Current MS Customers 6 296 1,800

Total MS Customers 6 399 2,200

MS Employees 10 695 7053

% of All Customers using MS 2% 8.7% 20%

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Managed Services Business Model

Metric Low Avg High

Contract Margin 18% 33.3% 47%

Field Margin 15% 28.7% 47%

Total Direct Costs 0% 8.5% 21.7%

Direct Net OI 5% 21.4% 36%

Total Allocated Costs 0% 9.7% 27%

Allocated Net OI 5% 11.7% 36%

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Contract Metrics: Summary

Contract Parameter Low Avg High

Closed: Actual Duration 8 mos. 36 mos. 72 mos.

Active: Projected Duration 12 mos. 36 mos. 60 mos.

Closed: Projected Annual Value $75k $4.7m $13.3m

Closed: Actual Annual Value $75k $4.6m $16.7m

Active: Projected Annual Value $30k $5.5m $24m

Closed: Projected Margin 20% 35.9% 50%

Closed: Actual Margin 18% 37.6% 55%

Active: Projected Margin 20% 35.8% 50%

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Key Practices Summary

Topic Observation %Engineering org model Vast majority have dedicated engineering 85%

Channel vs. direct sales Vast majority primarily sell direct 81%

Marketing org model Large majority have dedicated marketing 69%

Contract C-Sat Large majority DO NOT measure contract C-Sat 62%

MS dashboard Large majority have an MS operations dashboard 62%

Real-time contract profit Large majority CAN NOT track contract profit RT 62%

Sales org model Majority have a dedicated sales force 54%

Partner certification Majority DO NOT have formal partner certification 54%

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Managed Services Business Model

Managed Service Business Model: Basics

36%

21.4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Contract Gross Margin Direct Net OI

27

Managed Services Business Model

PS and MS Business Model Comparison

33.3%

21.4%

34.0%

10.8%

0%5%

10%15%20%25%30%35%40%

Contract/Project Gross Margin Direct Net OI

Managed Svcs Professional Svcs

28

Managed Services Business Model

MS Business Model, including Costs (% of MS Revenues)

33.3%

5.2%

28.7%

8.5%

21.4%

0%5%

10%15%

20%25%30%35%

Contract GrossMargin

Field Costs Field GrossMargin

Total Belowthe Line

Direct Net OI

29

Managed Services Business Model

MS and PS Business Model Comparison

33.3%

5.2%

28.7%

8.5%

21.4%

34%

8.8%

25.3%

14.5%10.8%

0%5%

10%15%20%25%30%35%40%

Contract GrossMargin

Field Costs Field GrossMargin

Direct Belowthe Line Total

Direct Net OI

Managed Svcs Professional Svcs

30

Managed Services Business Model

Managed Services Direct Below the Line Costs (% of MS Revenue)

4.3%

0.5%1.7% 2.0%

8.5%

0%1%2%3%4%5%6%7%8%9%

Direct Sales Direct Mktg Direct Engin Direct G&A Direct Belowthe Line Total

31

Managed Services Business Model

Total Direct Below the Line Costs as % of Field Margin

30%

57%

0%

10%

20%

30%

40%

50%

60%

70%

Managed Svcs Professional Svcs

32

MS Business Model Takeaways Pattern Recognition

Direct cost model for MS: about twice as profitable as PS MS is more profitable including allocations than PS is without

allocations• Main reason 1: much lower field costs (expected)• Main reason 2: much lower below the line investments (not

expected) Relatively, MS invests much more in direct sales and much less in

direct G&A than PS Relatively, allocations are much higher than direct investments for

Engineering, much lower for G&A

Pattern Differences Business model line items ranges are wide

33

Key Takeaways from 2008 Study Key On Target Results

Contract margin: 30% - 35% Operating Income: 20% - 25% Investment level: 7%-10% Sub-contracting margins: 10%-19%

Aligned with typical PS sub-contracting margins

Growth rate: 20%-29% Key Common Practices

Charter weighted toward revenue growth Break out from CS and PS into semi-independent BU Pricing: monthly Contract length: 3-year Fund dedicated Services Engineering for MS

34

Lessons Learned from a Career in Building Managed Services Businesses

George Humphrey, Global Strategy and Product Line ManagementAvaya Operations Services

May 9, 2012Common success factors and failure points, open Q&A

Avaya - Proprietary. Use pursuant to your signed agreement or Avaya policy. 3636

Four Things To Focus On

① Defining Managed Services (Offer)

② Selling Managed Services

③ Delivery

④ Operations

Avaya - Proprietary. Use pursuant to your signed agreement or Avaya policy. 3737

Background

Managed Services Definition:

Out-Tasking, Selective Sourcing and Outsourcing

Remote Management leveraging vendor IP

Avaya - Proprietary. Use pursuant to your signed agreement or Avaya policy. 3838

① Offer

Definition– ITIL Alignment

– “Productization”

Differentiation– Breadth of offers in your domain

– Unique value-prop

– Intellectual property

Marketing– Leverage analysts and press

– Must have references (best form of advertising)

– Advertising/email campaigns not very effective

Metrics backing P&L by offer

Must Measure:P&L by Offer

Avaya - Proprietary. Use pursuant to your signed agreement or Avaya policy. 3939

② Selling Managed Services

Dedicated MS Sales Specialists – MUST HAVE– Typically sales force sells something else (Hardware, Transport, etc)

– Front line sales force identifies and shepherds day 1

Compensation

– Must sell on TCV not Revenue

Find compelling event– Technology refresh, IT downsizing, restricted budgets, M&A, transport

transformation, etc.

Focus on the value proposition– TCO Reduction

– Accelerated ROI

– Improved performance Must Measure:Funnel & TCV Bookings

Avaya - Proprietary. Use pursuant to your signed agreement or Avaya policy. 4040

③ Delivery

Service Automation – MS Platform– CMDB

– Capture, correlation, remediation

– Performance monitoring and management

– Portal for service transparency

– ITIL Aligned ITSM architecture/tools

Process– ITIL Aligned

– 90% of engineers just follow process

– Don’t need cowboys!

Customization– Based on standard offer

– Delivery team must be part of customization

Must Measure:% Proactive% Resolved in xHrs% SLAs hit by client

Avaya - Proprietary. Use pursuant to your signed agreement or Avaya policy. 4141

③ Delivery (Continued)

Onboarding– First 6 moths is key

– Client participation key

Offshoring– Yes – non country specific functions

– Major cost advantages

– Governance is crucial

Organization– Delivery and Sales tightly linked

– ITIL Aligned

Must Measure:% Proactive% Resolved in xHrs% SLAs hit by client

Avaya - Proprietary. Use pursuant to your signed agreement or Avaya policy. 4242

Operations

3yr P&L by Offer– Revenue

– Cost

– Expense Plan

Proactive Contract Management– Typical is 3 yr seeing requests for 5yr+

– Obsessive forecasting down to each client

Vendor/Supplier Management– Gartner: 60% of Outsourcers outsource to other outsourcers

Business Process Governance– Accounting, Finance, HR Governance, etc

Must Measure:All Metrics of the entire organization

Managed ServicesCritical Data Needs

Thomas Lah| TSIA

Service Line Dashboards

44

Top Industry Metrics

45

Area Key Metrics

Sales Contract Length, Discounting Rate

Delivery

Partner Management

Operations

Offering Development

Marketing

Financial Business Model

Top Industry Practices to Benchmark

46

Area Key Practices

Sales Dedicated Sales, $ for $, Contract Size

Delivery

Partner Management

Operations

Offering Development

Marketing

Financial Business Model