Software Executive Magazine

OCTOBER/NOVEMBER 2017

Software Executive magazine helps software executives grow their businesses by showcasing the business best practices of our readers, executives from established and innovative software companies.

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and still under-delivering, then it is time to figure out where spending is going and why you are not getting a better return. It may be time to update tools, skills, and/ or practices (possibly some staff "realignment"). When it comes to underfunding, industry statistics alone will not be enough to convince executives or the board to spend more on support. You need to make the case that incremental spending will have a positive impact on the business. If you promise higher levels of satisfaction, be prepared to forecast how increased satisfaction will enhance overall company financials (improve renewals, stem attrition, etc.). Regardless of how higher levels of funding will be used, be prepared to justify the return from this investment. SUPPORT MARGINS Software publishers outperform hardware and systems vendors with average support and maintenance mar- gins of 67.8 percent and 55.9 percent respectively. Sup- port and maintenance margins typically outperform professional services and training margins, which fall within the 20 to 40 percent range. A key factor contrib- uting to support margin performance is the fact that support and maintenance is sold as an annual service, and many of the benefits provided are relatively low cost and/or not exploited by the customer. When sup- port programs are seldom used, they cost less to deliv- er, and this bodes well for margin performance. In this case, margin performance may be high, but support re- newal rates will likely suffer. The challenge is to balance margin performance with a level of service that cus- tomers feel is valuable. It is often better to assure multi- year renewals than earn a few extra points of margin by delivering high-value services. WHAT IS YOUR IDEAL TARGET MARGIN? Optimal margin performance is ultimately a function of support's efficiency and customers' sensitivities. Effi- cient support organizations can deliver services at lower costs and thus yield higher margins. The market also has a say in what is reasonable. You cannot charge a lot for a service and not provide an acceptable level of service. Support has evolved from a tactical necessity to a stra- tegic imperative for software companies. Whether you invest 2 percent or 10 percent of total revenue to fund support operations, you should expect an excellent di- rect financial return, as well as indirect benefits from sustained customer engagement. S age support as a profit and loss (P&L) center. There is no right or wrong answer about which model is better if support is held accountable to appropriate financial targets. With that said, most support organizations are managed as cost centers, and only under specific cir- cumstances does support need to be managed as a P&L. MANAGING SUPPORT AS A PROFIT AND LOSS ▶ Support runs largely as a separate and autono- mous business. ▶ Support has the means to market, sell, deliver, and renew service programs. ▶ The value from support programs extends well beyond basic break-fix services and includes many value-added options. ▶ Support has negotiated financial and service level relationships with adjacent departments to minimize service level disruption (e.g., develop- ment is held accountable for escalations and bug fixes, and support pays its share of updates and upgrades sold as part of its offerings). MANAGING SUPPORT AS A COST CENTER ▶ Support is part of, and accountable to, a high- er-level profit and loss center (e.g., aligned to a specific product line). ▶ Support is highly dependent upon funding and resources from other departments. ▶ Support programs are included as part of a subscription or product offering, and support is funded through an allocation from product or subscription sales. ▶ Support does not have the means to market, sell, or renew programs. SUPPORT FUNDING LEVELS Support funding levels range dramatically based on many factors, including the size of the company, the type of product being sold, and the growth rate of the company or specific product line being supported. The right level of funding is best determined by measuring the return the company receives from its investment in support. The return may be measured by satisfaction levels, service level performance, or financial terms such as revenue contribution or profit. ARE YOU OVERFUNDED OR UNDERFUNDED? Yes, overfunding happens. Are you experiencing hy- pergrowth? Are your services highly profitable? Are you keeping customers very happy, and, as a result, are they buying more and renewing subscriptions? All is well, but watch your margins. If you are overfunded T H O M A S J . S W E E N Y , principal and founder of ServiceXRG, leads research initiatives and publishes extensively about service industry trends and best practices. He helps companies develop and execute service strategies that strengthen customer relationships and optimize financial performance. Prior to founding ServiceXRG in 2004, he held positions at IBM/Lotus, Gartner, and the Service and Support Professionals Association now known as TSIA. 13 SOFTWAREEXECUTIVEMAG.COM OCTOBER/NOVEMBER 2017

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