I’ve worked in or been associated with field service and customer support my entire adult working life. I started a few decades ago in what was called the field engineering division at IBM as a night dispatcher and parts room clerk while going to school. Back then, and for many years to follow, service was considered just an afterthought, a necessary evil. It wasn’t seen as a significant revenue generator by most companies, and it certainly wasn’t regarded as an important contributor to overall profit margin. Product sales ruled, and so did product sales management. The service manager where I worked even reported to the branch office sales manager, a scenario that was typical in many organizations at the time; unfortunately, still is in a few.
My, how times have changed. Service has advanced in significance and is now a crucial contributor to revenue and margin in most organizations. Likewise, service management has advanced in importance, influence, and stature.
The Technology Services Industry Association (TSIA) just completed a report on Maintenance Pricing Practices, which underscores these developments. The report is based on a survey the association conducted in late Q3 and early Q4 of 2009. According to this comprehensive TSIA research, when companies treat service as a profit center today, they can expect the following key margin contributions from service and support revenues:
- Average margin contribution from service for all industries = 52.4%
- Average margin contribution from service for enterprise hardware companies = 53.7%
- Average margin contribution from service for enterprise software companies = 60.3%
In fact, margin contributions from service exceed margin contributions from product sales in both enterprise hardware and enterprise software. See chart below:
Moreover, service interacts with customers far more often than anyone else in most companies. Some years ago in fact a large consulting firm released a study showing that field service technicians had face-to-face contact with customers approximately five times more often on average than the customer’s sales person. Telephone support’s contact with customers may exceed that ratio, and electronic and web self-service interactions will almost certainly outpace the number of times a customer talks to a sales person. In short, service can have a greater and more frequent impact on a customer’s brand perception and their propensity to re-purchase than can a sales person.
For that reason I, and many others in the service business, have long advocated that customer service and support management should be given a seat at the the senior executive table. And there’s sound financial justification for this position as well according to the report. The survey results reveal that when a senior vice president (SVP) or higher is at the helm of service operations, profit margins from service revenues go up across the board:
- the average margin jumps nearly 5% across all industries combined
- it’s up a healthy 4% in enterprise hardware
- the rise isn’t as dramatic in enterprise software, but it’s up nonetheless, by about 1/4 of 1%.
So it’s not a matter of opinion, service and support do matter from a profit margin perspective, and the level and stature of the executive heading up service operations positively impacts that number.
Thanks for your interest – IT MATTERS!
Tags: Hardware Service, Maintenance Revenue, Service Margins, Service Revenue, Software Support
Michael,
Congratulations on the new blog and interesting post. As a veteran of the enterprise support industry I am always curious about the way different companies use to calculate support margins, which expenses are taken into account and which not. Do you have a best practice you can recommend?
Haim, we did not ask the survey participants to explain how they calculated their support margins, nor did we stipulate how they should calculate it for their answer. We left it up to each respondent to enter the margin according to their normal method of calculating gross profit margin on service and support. I have not gathered sufficient information on this from our member community to recommend a “best practice” as you request. For now I would just suggest the standard calculation of service & support revenue minus all cost of delivering service & support, divided by total service and support revenue.
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