The FT Word
The FT Word is a free monthly newsletter with support management tips. To subscribe, send us email with your email address. The subscription list is absolutely confidential; we never sell, rent, or give information about our subscribers. Here’s a sample.
Welcome to the August 2003 issue of the FT Word. Please forward it to colleagues you think may enjoy it. In this month’s issue
· Evidence management
· Support profitability
· A brand new FT Works booklet: Managing Support Strategically
An interesting article in the Harvard Business Review (2/03) discussed best practices at the Mayo Clinic. The Mayo Clinic is a hospital, so what’s the connection with support? Plenty, as it turns out. The Mayo Clinic, like many hospitals, has a problem demonstrating the quality of its “product” because it’s intangible, just like support.
So what does it do? It uses what is called evidence management: the science and art of giving experience-based clues to customers (patients) to the quality of the service. Think of it as advertising through the service itself, telling a story through what you do. Here are some examples of what Mayo does:
· Doctors call patients directly, including at home and on the weekend, to check on them and to explain procedures
· The staff focuses on the person, not just the medical ailment
· Staff members are recruited partly on the basis of soft skills, even for technical specialties
· Doctors collaborate in full view of the patient — not behind closed doors
· All records of all the doctor visits are kept in a single, electronic “EMR” system that is also accessible to the patients.
· Facilities are designed explicitly to relieve stress
· The names of attending doctors and nurses are always posted for patients and families
Now substitute support rep for doctor and CRM for EMR and see what you can do to use evidence management in your support operation. The details of what customers see, hear, and experience is a big part of how they perceive the quality of the overall and intangible service.
Making Support Profitable
Can support make money? How much? And how can support profits be maximized? These are the three questions we tackle here.
1. Assess your chances
Yes, you can make money in support if
· You charge for support (no miracles here) and
· You charge pretty much all customers. “Free” support in the form of a warranty program is not an obstacle to profitability as long as most customers who consume support are expected to pay for it in the long run.
If you have historically provided free support, but are starting to offer fee-based support, don’t be overly optimistic that you will be able to make money soon (unless you are terminating all free support.) In particular, don’t try to subsidize free support with fee-based support: it’s a losing battle and it’s better to account for both types of support separately.
2. Set a profit target
What is an appropriate profit margin to aim for? The simple answer is: it depends.
Profit margins are higher for large customer bases, both because fixed costs can be spread over a larger base and because large customer bases are attained over time, which means that the bulk of customers has experience with the products, hence generates fewer demands on the organization. Another rule of thumb is that inexperienced customers create smaller margins, which means that you should anticipate profit dips with new releases or with massive acquisitions of new customers. As a result, support centers for startups should not expect to make money for at least the first few years.
Margins are higher for higher-priced services. Incident-based support usually barely breaks even while annual support contracts are juicy, at least once the customer base gets to a respectable size. Keep in mind that customers who pay high fees also expect an excellent level of service, including skilled support staff and extras such as 24×7 support so you will have to make certain investments, but they should pay off with the much higher revenue level per customer.
So what’s the magic profit margin target? At the high end, for established companies with large, experienced customer bases and reasonably stable, high-priced products, margins at the 80% level are not uncommon. Some boast even higher numbers, although I find that anemic funding makes for unhappy customers overall, so better may be the enemy of good here!
Smaller, newer companies, with reasonably stable products should be able to produce margins in the 60% range, still a respectable number.
Support margins should always increase over time, as the customer base grows larger in size and experience, internal efficiency improves, and, it’s to be hoped, products gain in stability (there can be setbacks here, as we know). A good discipline is to plan to always increase the margin from year to year.
Support margins are not reported in financial documents, which instead list margins on services, including support, training, and consulting. For accurate numbers, you must rely on direct connections. And, to complicate matters, there’s no standard way to compute support margins, as important items such as IT costs or rent may or may not be included in the computation. So if you are comparing margins with a colleague, always ask what’s included.
3. Package support attractively
Carefully-defined support packages that are well matched to customers’ needs are always good to have, whether or not you sell support, because they nicely set expectations for the customers, and for the support staff too.
When you want to sell support, packaging becomes a critical activity. Because support is intangible, packages make it easier for customers to see value and reality in what they are buying. And you want to create packages that make sense for customers, met their needs, and eventually open their wallets. Know your customers, explore their support needs, and test your ideas with them before launching packages.
For most operations, one size does not fit all: you must define several support packages to match different customer types. Don’t go package-crazy, however: usually a handful of packages are enough to serve the entire customer base without creating delivery nightmares. A great approach is to use Russian-doll packages, where each bigger package includes everything in the next smaller one, and something more.
Once you got the packages right, communicate them to your customers via appropriate channels, be it through your web site, at renewals time, or when customers contact you with support questions. You don’t need splashy materials, but they should make sense and be available to all potential customers.
4. Sell support aggressively
The more customers buy support, the more likely it is that you will be profitable. Ideally, you want all customers to purchase support as they purchase the product. In this case, you need to make sure that salespeople know how to sell support, which is sometimes a challenge since support is intangible. Provide good collaterals and other sales assistance and consider dedicated support salespeople for significant support deals.
Another approach is to let salespeople sell the product, but immediately (or during the warranty period) approach customers with the support offerings. It seems that customers are more likely to buy support while they are buying the product, so it would not be my first choice, but sometimes that’s the best you can do.
Regardless of how the initial support sale was made, you need to focus on support renewals. If you’re serious about support revenue, set up renewals as a sales operation rather than an invoice-creation operation. Staff it with salespeople, not accountants. Run it like a sales operation including quotas.
5. Cut costs
It’s great to generate support revenue, but it’s critical to watch costs if you want to maximize profits.
Recognize that some investments are required to sell support, and especially high-end packages. Paying customers expect short response times, efficient support portals, and appropriate proactive help, all of which costs money. Don’t be so miserly as to fail to deliver on your service-level agreements.
But don’t be overly complacent either. Focus your attention on big-ticket items, keeping in mind that small, repeated leaks add up. Be on the lookout for poor processes, which waste resources daily without bringing any benefits to customers. Review your organization chart to minimize staff positions and managers. Manage performance for everyone, at every level. A non-performing employee not only fails to deliver on his or her individual performance, but also decreases other people’s productivity. Monitor financial reports faithfully. In brief, run your operation like a business, which it is.
Managing Support Strategically
Would you like to push your support operation to the next level? Would you like to position yourself as a candidate for an executive job? Then you should read Managing Support Strategically, the brand new FT Works booklet. It starts by showing you how to make time for strategic thinking and how to create a discipline for strategic planning. It then moves to a structured methodology for creating or changing a support strategy, which you can use as a blueprint to create your own. Can strategy be made practical? Managing Support Strategically shows that it is, indeed, possible and can be yours for $40.
A complete description and order information can be found here.
FT Works in the News
Just Enough CRM is speaking Italian! I have a lovely copy on my desk promising La Guida Completa per l’analisi e il miglioramento dei Processi CRM. Perhaps you’d like to stick with English? More details here.
SSPAnews published an article I wrote entitled Hiring Stars. You can read it at http://www.thesspa.com/sspanews/072203/article1.asp
I conducted a webinar with Soffront about best practices in support. A recording will be posted shortly but the slides can already be found at http://www.soffront.com/Seminar/sjsu.html
Curious about something? Send me your suggestions for topics and your name will appear in future newsletters. I’m thinking of doing a compilation of “tips and tricks about support metrics” in the coming months so if you have favorites, horror stories, or questions about metrics, please don’t be shy.
650 559 9826