Monday, August 11, 2014

Attributes of High Performing Teams

The goal of building high performing teams is a popular one. Nobody is going to say, “I want to build a low performing team.” It’s important to understand what a high performing team looks like before trying to understand how to help build one. High performing team display the following:

1.    Trust between team members & lack of finger pointing.  Team members trust each other. They assume members are competent and capable. They accept, without judgment, that every member has strengths and it’s not possible to be great at everything. They recognize that their strengths compensate for their weaknesses. If someone drops the ball, someone else will be there to pick it up.

2.    Team members willing to step outside their comfort zone. There is no “that’s not my job” attitude. Instead, the team embraces the notion that they are all in it together. Members are willing to step outside of their comfort zone in order to help the team as a whole.

3.    Diverse and complementary skills, backgrounds, and experiences. The team isn’t made up of members who suggest similar solutions because they all look at things the same way. Different backgrounds, skills, and experiences, results in better solutions because the team looks at the problem from different perspectives. Diverse teams can take longer before they perform at a high level. However, they’ll reach an even higher level of performance than more homogenous teams.

4.    Desire to achieve.  There is a commitment to achieving team objectives and a desire to go above and beyond minimal expectations. The team has high standards and members of the team create a positive feedback loop that makes everyone better.

5.    The team’s values & culture are self re-enforcing. Team members are personally invested in the team’s performance and supportively hold each other accountable. Leadership isn’t solely responsible for re-enforcing team values and culture. Instead the team itself shares this responsibility.

6.    Aligned behind common goals.  The team is pulling in the same direction. They share a common vision and understanding of what they’re trying to accomplish. Individual performance evaluations are aligned with team objectives and encourage the right behaviors.

7.    Some of the team members have worked together before. Some members have previously worked together. They’ve achieved success, overcome obstacles, trust each other, are able to resolve conflicts, and understand how each other communicate. The entire team does not need to have previously worked together; just a significant sub-set of the team. If only a few members have previously worked together, they’ll achieve the same benefits after working together for a while.

8.    Ability to constructively resolve conflict. The team proactively identifies and resolves issues before they escalate, which minimizes conflict. When conflict does occur, it’s resolved constructively and often results in increased trust and understanding. This is accomplished by doing the following: (a) focus on the problem, not people; (b) focus on the future, not the past; (c) avoid blame game; (d) understand everyone’s position; (e) collaborate on the resolution.

9.    Believe they can overcome obstacles.  The combination of factors described gives the team the confidence they overcome difficult obstacles they encounter.

Related posts coming soon:

1.    Steps a leader can take to build a high performing team.
2.    Constructively resolving conflict.

Sunday, August 10, 2014

Benefits of Productized Services

Here is a list of benefits of productized services for companies that sell cloud-based software to business customers (e.g. Salesforce, Workday).

1.    Reduce customer concerns related to implementation costs. Mid-tier customers view the open-ended hours based cost model of consultants as a risk, which creates friction in the sales cycle. However, they view fixed-cost packaged services as less risky. Packaged services will reduce the sales cycle and increase pipeline velocity, resulting in lower customer acquisition costs.

2.    Easier to train employees. Packaged services are more defined, and as a result, training employees who deliver packages will be more defined so training employees will take less time. As a result, training costs will be lower and utilization rates will increase, which will contribute to higher margins. Furthermore, it may be possible for less expensive resources to be used, which will further contribute to margin expansion.

3.    More efficiently deliver services at higher quality.  Packaged services are repeatable and less variable. Employees will more quickly move up the learning curve increasing efficiency.  In some cases, automation tools may be used, which will further increase efficiency. Increased efficiency will positively impact margin. Improved efficiency will also enable more consistent delivery of services at a high quality level, resulting in more satisfied customers.

4.    Increased renewal rates. Mid-tier customers, who avoided traditional hour-based consulting due to concerns about cost and ambiguity of value, will purchase packaged services. This increases the likelihood that these customers fully take advantage of the services and achieve a higher level of success. As a result, renewal rates should increase.

5.    Increased service revenue. Packaged services should result in a higher attach rate if targeted at customer segments that currently don’t purchase services, as a result, overall service revenue should increase. However, cannibalization of existing services needs to be taken into consideration. I will address cannibalization in a future post.

6.    Revenue Recognition. Revenue recognition for packaged services that are not priced as a subscription and delivered over time can be recognized immediately, resulting in increased short-term revenue. However, cloud-based companies are viewed favorably due to their predictable revenue, and care must be taken to ensure increases in short term revenue recognition don’t result in unacceptably higher likelihood of revenue variability.

7.    More predictable demand. Demand for productized services are more predictable allowing better matching of demand to resource supply, which result in a higher utilization rate. This will improve overall margins.

8.    Higher margins for services. Many of the benefits described above, such as, higher utilization rate, increased efficiency, reduced training costs, and lower customer acquisition costs, will contribute to margins. Packaged services can further enhance margins by leveraging value based pricing where hourly priced services tend to use cost plus pricing that result in lower margins.

There are a number of addition issues to take into consideration when productizing services, such as, risk of cannibalizing of existing service revenue, and impact on partners. I will address these issues in a future post.
Related posts coming soon:

1.    Mitigating risks associated with productized services
2.    How does product management contribute to productized services?
3.    Ideas for productized services and increasing customer success

Saturday, August 9, 2014

SaaS 101

This post introduces basic concepts behind the SaaS (or Cloud if you prefer) recurring revenue business model. The purpose is to provide a basic understanding of key performance metrics that drive a SaaS business and as a foundation for future posts covering more in-depth topics. Initially, I’m going to keep things really simple. We’ll cover Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV).

Basic SaaS Metrics:
  • MRR – Monthly Recurring Revenue 
  • ACV – Annual Contract Value (Bookings)
  • OTR - One Time Revenue (One Time Bookings) 
  • Churn – Lost MRR Revenue or ACV (%) 

Monthly Recurring Revenue (MRR) is the revenue a customer pays per month for access to a service. Annual Contract Value (ACV) is the value of a signed contract over a year. So, if a sales rep signs a 2-year contract for $100k, the ACV is $50k, while the Total Contract Value (TCV) would be $100k.

One Time Revenue
One Time Revenue (or One Time Bookings) is non-recurring revenue. Common examples typically involve services like set-up costs, integration, etc. At Delve, we had several services that fell into this category. Here are a few examples:
  • Video MigrationMigration of video from the where the customer to Delve platform in the cloud. This involved uploading video files, encoding each file into different video formats and bit-rates, and handling pre-existing meta-data. We charged based on the number of videos migrated.
  • CDN Connection FeeIf a customer wanted to use his or her own CDN contract from a different vendor then we charged them a connection fee.
  • Video Player Customization - We would customize the standard video player based on a customer’s requirements. We had a Basic Customization option that was capped at 20 hours and an Advanced Customization option, which was based on the total number of hours.
These can be thought of as packaged services or “product-ized” services. They are recognized as revenue in the month they were delivered.

These services are often viewed as a form of sales enablement that not only helped close the deal but also increases sales velocity by reducing the sales cycle.  Reducing the sales cycle is important because increases the efficiency of your sales team, which the customer acquisition costs. Customers who used these services tended to be more satisfied. There services also made the Delve sticky by increasing switching costs. 

There are different types of churn:
  • Customer Churn - A customer fails to renew her contract. This results in complete loss of MRR for this customer. 
  • Feature Churn – A customer renews her contract, but chooses an edition of the product with fewer features, which results in lower MRR for this customer.
For example, Delve included basic analytics in the Standard Edition butmore advanced analytics came with the Enterprise Edition. If a customer concluded there was no value in the advanced analytics they might still renew but for Standard Edition. The customer isn’t lost, but there MRR is reduced.

How Churn Hurts
To start with a simple example, let’s take a company that starts off the year with $1B in MRR and compare the negative impact of churn at 2.5% and 5% over the course of 12 months without taking anything else into consideration. 
  • Churn of 2.5% reduces $1B MRR to $738M MRR by the end of the year. 
  • Churn of 5% reduces $1B MRR to $540M MRR by the end of the year
That 2.5% difference in Churn, which might not seem like much, results in an additional loss of 26.8% in MRR. In order for MRR to stay constant over the course of a single year the lost MRR with with new new customer bookings (ACV). Early on the difference isn’t significant, but as a company scales, mitigating churn with new customer bookings will become increasingly difficult.

MRR Expansion
MRR Expansion can be thought of Good Churn (or Negative Churn) where MRR instead of decreases. There are a few basic ways to achieve MRR Expansion. 

Usage Expansion 
Revenue increases as a result of a customer’s increased usage of the product. In the case of Salesforce Sales Cloud this could be adding additional seats. Dropbox charges more per month as the volume of storage increases. At Delve, we charged more based on how much video was streamed.

Customers are sold an enhanced version of your product with additional benefits. For example, a customer upgrading from the Professional Edition to the Enterprise Edition to take advantage of additional features like Custom Application Development or Salesforce Identity. An Up-Sell doesn’t always have to be about new features in the product itself. Instead, it could be purchasing a higher quality of service. For example, upgrading from Salesforce’s Standard Success customer support to its Premium Success customer support package.

Customers are sold an additional product. So, sticking with Salesforce as an example, this would be selling a customer or after they’ve  purchased Sales Cloud.
This can be very attractive for a company with a large installed base.The rational is that is costs more to acquire a new customer than to sell an additional product to an existing customer.

Increasing ACV
All three of the methods for achieving Good Churn (Usage Expansion, Up-Sell, Cross-Sell) can also increase the ACV when initially signing up a customer. For example, at Delve our sales reps would often attempt to up-sell a prospect from the Standard Edition to the Professional Edition if she felt it would better meet the customer’s needs.

Net Bookings

Net Bookings = New Bookings(ACV)+Expansion Bookings(ACV)+One Time Bookings – Churn(ACV)

Here is an example for Net Bookings using Salesforce Sales Cloud:

New Bookings 
  • 1 new customer, ABC Inc., who purchased Sales Cloud Professional (@ $65/month/user) for its 10 sales reps 
  • New Bookings = ACV = $7,800 ($65 * 10 users * 12 months) 
Expansion Bookings
  • 1 customer renewal, ACME Corp., renewed their Sales Cloud Professional contract with 5 users and added an additional 10 users. 
  • 1 customer renewal, XYZ LLC, renewed their Sales Cloud Professional contract with 10 users and upgraded from Standard Success support to Premium Support (20% add to ACV). Since Premium Support is a subscription it is spread out of the 12-month term of the contract.
  • Expansion Bookings = ACV = $9,360 = [($65 * 10 users * 12 months) * 1.20] 
One Time Bookings = $0 

ACV Churn 
  • 1 customer lost, WOW Corp., failed to renew their 10 user contract for Sales Cloud Enterprise (@ $125/month/user)
  • ACV Churn = ($125 * 10 * 12) = $15,000
Net Bookings = $7,800 + $9,360 + $0 - $15,000 = $2,160

Ending MRR

Ending MRR = Starting MRR – MRR Churn + MRR Expansion + New MRR

Translating the above Net Bookings example to Ending MRR:
  • Starting MRR = $10,000 (MRR from the previous month)
  • MRR Churn = $1,250
  • MRR Expansion = $780
  • New MRR = $650 
  • Ending MRR = $10,000 - $1,250 + $780 + $650 = $10,180
Ouch, loosing Wow Corp. really hurt. Despite renewing 2 customers and adding a new customer, MRR barely increased.

Outside-In Product Management

Product Managers try to solve a user's problem, e.g., access  files from a smartphone, by defining requirements that are translated by engineering into a product. Often product managers don’t spend much time thinking about a customer's experience outside the confines of the software itself. Without realizing it, they have confused the interacting with buttons on a screen with the far more expansive overall customer experience. 

This blind spot is result of Inside-Out thinking. 

Historically, this is particularly true of traditional enterprise software. The variability in customer needs results in the heavy use of professional services and support. It’s easy for product managers to fall into the trap of thinking about these things as "other stuff" that falls outside of the product. Leading consumer technology companies do a much better job of Inside Out thinking. They start with the customer, putting themselves in his or her shoes, and work backwards to a solution. 

1.    Amazon – Amazon's website is just one component of Amazon’s customer’s experience. Another aspect of a customer's experience is how quickly a customer receives their order. Amazon has invested distribution centers so they can deliver packages to their customers faster than their competitors. This is part of the customer experience that sits outside of the website. When I worked at Amazon, we were constantly reminded that we were running a “service” and not a website. 

2.    Uber – As a consumer you can download an app to your iPhone and conveniently request quality transportation. Part of the customer experience is the simple and elegant app, but another part of the experience includes the quality of the vehicles, the professionalism of the drivers, and the availability of cars. A nice app with no available cars doesn’t make for a positive customer experience. 

3.    Starbucks – Howard Schultz viewed the Starbucks product to be more expansive than coffee and lattes served at Starbucks, but rather, the ambiance of the store, the smells, the baristas, and the ability to sit to enjoy your coffee. That’s the overall customer experience delivered by Starbucks. 

The “Computerization of IT” trend is about applying some of the approaches found in consumer oriented technology services to enterprise oriented technology services.

The following phrases can serve as reminders to use Outside-In thinking:
  • The customer wants the hole, not the drill
  • Start with the customer and work backwards
  • What job was this product purchased to do?

Thursday, August 7, 2014

Resolving Conflict

The ability to resolve conflict is a critical skill for anyone in the workplace. It is particularly important for those in a direct leadership role or often dealing with cross-group activities. Some people try to pretend the conflict isn’t there; however, unresolved conflict has a tendency to fester and make things worse over time. That’s why learning to constructively deal with it is such an important skill. Here are some steps you can take to help constructively resolve conflict.

It’s important to accept that conflict is going to happen. You can’t run away from it. As a leader, it’s your job to deal with it.

Step 1 - Prevention
While conflict is inevitable in the workplace, you can take proactive steps to prevent conflict from escalating. The best way to do that is to invest in building relationships before there is conflict. If you have a relationship with someone, some level of trust, they are less likely to escalate and more likely to come directly to you for a quick and often painless resolution.

Step 2 – Remain Calm
If you do find yourself in a conflict, it is important that you remain calm. You are not doing yourself any favors by loosing your cool and it is only going to escalate the conflict. Don’t try to interpret what someone else is thinking and assume the worse. Remind yourself that conflict happens all the time and usually can be constructively resolved.

Step 3 – Listen to Understand
If you want to diffuse a situation and prevent escalation, then seek to understand the other person’s point of view. Focus on the problem, not the person. Listen to understand, not to argue. Resist the urge to interrupt the other person and issue a rebuttal. Use active listening skills to show you are listening and sincerely care about their perspective.

A lot of times, you can make progress by simply letting the other person know that you actually care about the issue that is bothering them.

Step 4 – Ask Questions
Ask questions to clarify the other person’s issues. This not only re-enforces that you care about their point of view, but helps you zero in on the core issues driving the conflict. Restate or paraphrase what you think you are hearing and ask the other party if you correctly understood what they were trying to say.

Step 5 – Share Your View
Calmly explain your perspective on the issues. Use “I” statements so that you are conveying your perspective as opposed to making a judgment about the other person or their position.

Step 6 – Identify the Problem
Identify the true core issues or problem. Focus on the root cause instead of trying to enumerate every peripheral issue. Come to a common agreement on the problem driving the conflict. Agree to next steps, so that the conflict is actually resolved, instead of forgotten only to return later.

Up Next:

  • Resolving conflict between members of your team or between someone on your team and their peer on another team. 
  • Leading a group of people through the conflict resolution process. 
  • Creating a team culture that reduces the frequency of conflict on your team.