Maintenance Revenue Under Attack:

Transcription

1 Maintenance Revenue Under Attack: How much of your current maintenance revenue stream will be there next year? Sales Analytics, Inc. (888)

2 Contents Introduction... 3 More About HAFs... 3 The Impact of HAFs... 4 Conclusion... 6 Editor's Note... 7 About Sales Analytics... 7 Maintenance Revenue Under Attack: 2

3 Introduction Enterprises are constantly searching for ways to reduce external support and hardware maintenance costs. Considerations can include moving hardware resources to the cloud, opting for lower cost services from third party vendors and eliminating legacy equipment altogether. For many OEMs, maintenance revenues are a steady source of passive income. They tend to treat maintenance revenues as an annuity and defend them rather than recognize them as assets that could be managed to optimize potential revenue opportunities. To aid OEM service sales, Sales Analytics (SAI) has identified several Hidden Attrition Factors (HAFs) that can have a negative impact on future maintenance revenue:! Third-Party Maintenance Companies! Contract-Renewal Price Negotiations! End-of-Support Life! Customer Data Center Consolidations! Self-Maintenance! Outsourcing! Contract Accuracy! Competitive Replacement of Systems! Service-Level Reduction! Loss of Contract to Another OEM Service Reseller The impact of these HAFs can be masked by the inflow of new service agreements, renewals, and the increases in the contract value after warranty. Few service organizations capture the information required to track the financial impact of HAFs. Many times, maintenance providers are surprised by the non-renewal or receipt of a Request for Proposal on their own service contracts. Even when maintenance providers can retain their service contract in a competitive bid, the cost of sales is significant and the effort typically results in lower revenue and margins. More About HAFs The HAF effect is greatest in systems over three years old. According to Moore's Law, these systems are at least two generations behind new technology. For these older systems, service costs are increasing, leases are ending, depreciation has expired, and new competitive systems are being targeted as replacements all of which represent the sweet spot for third-party maintainers and competitive vendors. Maintenance costs of older systems are often the same as the cost to maintain equivalent new technology. This is a situation where customers realize a performance benefit and service providers can maintain their revenue stream. Maintenance Revenue Under Attack: 3

4 The Impact of HAFs Let's look at the impact HAFs have over five years. The model assumes that lost revenue occurs on existing contracts of older systems. The model subtracts the lost revenue from the current maintenance contract base revenue, and then adds the new maintenance revenue. The industrystandard maintenance revenue-management process tends to consist of administrative functions, (add, changes, moves, and deletes to a contract) and contract renewals. The following assumptions are used:! Beginning maintenance revenue per year: $30,000,000! Impact of HAF (Hidden Attrition Factor) per year: -15%! New revenue growth per year: +22%! Proactive management and upgrade analysis: +5% (Reduction of the HAF %) Table 1 shows the HAF impact over a 5-year period. While there is a positive growth in maintenance revenue (4% CAGR), there is a substantial loss of existing revenue over the five years, which may be hidden from view. Maintenance Revenue Under Attack: 4

5 Table 1. HAF Impact Over Five Years Industry Standard Year Starting Revenue Loss New Ending Revenue 1 $ 30,000,000 $ 4,500,000 $ 5,610,000 $ 31,110,000 2 $ 31,110,000 $ 4,666,500 $ 5,817,570 $ 32,261,070 3 $ 32,261,070 $ 4,839,161 $ 6,032,820 $ 33,454,730 4 $ 33,454,730 $ 5,018,209 $ 6,256,034 $ 34,692,555 5 $ 34,692,555 $ 5,203,883 $ 6,487,508 $ 35,976,179 Totals $ 24,227,753 $ 30,203,932 CAGR 4% Table 2 shows the impact of a proactive account management installed-base sales program. The ability to slow the HAF impact will significantly increase revenue growth. Table 2. HAF Impact Mitigated by Sales Analytics for Account Revenue Improvement (SAFARI) Maintenance Revenue with SAFARI Year Starting Revenue Loss New Ending Revenue 1 $ 30,000,000 $ 3,000,000 $ 5,940,000 $ 32,940,000 2 $ 32,940,000 $ 3,294,000 $ 6,522,120 $ 36,168,120 3 $ 36,168,120 $ 3,616,812 $ 7,161,288 $ 39,712,596 4 $ 39,712,596 $ 3,971,260 $ 7,863,094 $ 43,604,430 5 $ 43,604,430 $ 4,360,443 $ 8,633,677 $ 47,877,664 Totals $ 18,242,515 $ 36,120,179 CAGR 10% The financial impact is significant; a 250% improvement in the CAGR, with a 5-year revenue delta of $11,901,485! The data model in Table 1 and Table 2 is intended to frame the concept of HAF and spark discussion within your organization. The precision of the model is at a macro level. Many factors will influence the HAF percentage for your industry and organization. Maintenance Revenue Under Attack: 5

6 Conclusion Slowing the attrition rate of lost service revenue must be a key strategic component for all maintenance service providers. The challenge to management is what can be done about the situation. The axiom that keeping a customer is much cheaper than the cost to gain a new customer is certainly true in the services business. Taking proactive steps to slow the HAF impact will reward an OEM with increased revenue/margin and increase customer appreciation. Consider the following: Every other service provider will offer lower maintenance service pricing than the original OEM. By representing the OEM service organization, you must offer clear differentiation in the eyes of the customer. As systems age, SAI recommends that service providers review the common denominators of the "Maintenance Revenue Threats" for their customer base. We believe you will find the age of the systems is the single largest factor in your risk assessment. One solution is the proactive upgrading of your customer systems as soon as it makes economic and technological sense. Replacing the old with the new secures a portion of your maintenance income for the near future, prevents a loss of market share, and increases brand equity at the account. The most vulnerable entry point for all competitors is older technology. If you lose the system, you lose the maintenance service revenue along with it. Service organizations must realize the importance of supporting technology refresh programs. The first mover has the advantage; will you be proactive or reactive? The reality is that all customers seek ways to improve cost and are open to new ideas, new solutions, and new relationships. Aggressively managing the average upgrade cycle time of your customers is critical to creating and maintaining loyal customers. The SAFARI Breakthrough Intelligence from the SAFARI platfrom is a critical weapon for managing your maintenance revenue base and attacking the maintenance revenue of your competition. SAFARI provides key tools for vulnerability analysis and proactive account management while empowering you to provide value added consultative advice to your customers, which include many upgrade scenarios. Maintenance Revenue Under Attack: 6

7 Editor's Note SAI is a proven service organization that assists high-technology sales and service organizations to improve the financial performance of their customer base. Combining 30 years of sales and service experience in the high-technology industry, SAI has performed in-depth analysis of thousands of installed computers systems to pinpoint which systems are at high risk to the "Maintenance Revenue Threats" and identify situations where end-users can migrate to new equipment with service for less than their current maintenance spending. About Sales Analytics Established in 2002, Sales Analytics, Inc. (SAI) specializes in helping companies manage the technology-buying lifecycle of their customers in the critical areas of technology refresh and customer-information systems. Based in Morgan Hill, California, SAI uses unprecedented computer modeling to identify actionable and immediate selling opportunities a breakthrough in the management of a company s customer install base. Our ground-breaking technology is coupled with our commitment to earn the trust of, and build long-term relationships with, our clients. Our high-touch customizable approach empowers organizations of all sizes the framework and knowledge to grow their sales and marketing, and maximize their customer install base revenue and satisfaction. Sales Analytics, Inc. Mt. Pleasant, SC Contact: Kerry Roller, President T: (888) E: success@salesanalytics.com W: Maintenance Revenue Under Attack: 7