Being Careful of What You Ask For...

March 2005 - BEK Best Practices Newsletter

This month, Jim Kissane, a partner at RSViP Inc. will share some thoughts, tips and tricks on professional services.

Technology companies like other firms are first and foremost driven by financial performance, which can affect decisions and strategies. When launching a new service within your business to increase your “brand”, care must be taken to make sure that this venture does not change the market impression of your firm in ways you did not foresee.

Newton’s third law states: "For every action, there is an equal and opposite reaction." This applies to “customer” economics, especially as relates to how they perceive your brand. Thus it is important to have an understanding of this intricate cause and effect model before launching new businesses within your business that have the potential for damaging your core "brand". Professional Services (PS) is a natural outgrowth considered by many traditional “product” companies selling software and hardware, but as many have found, it is a potentially perilous road.

Done well, Professional Services can increase your “touch-points” with your customer base, enhance your brand, and if you have a business with slim margins, could add a couple of points of EBITDA to boot. On the other hand, consider what happens if your business model is built on a heavy percentage of lucrative software support contracts. Professional Services, which can be labor cost intensive, could also drag down your normal margins in this latter case.

Professional Services can also enhance or hurt the image of your firm.

One example we think appears to be well thought out is Best Buy’s "Geek Squad". Recognizing the market preference shift, Best Buy purchased Geek Squad in 2002 and turned the 60-employee company into a 6,200-strong 24-hour service, enhancing the image of the nation's largest electronics retailer. "It's less of a do-it-yourself and more of a do-it-for-me marketplace now," said Sean Skelley, a senior vice president of services at Best Buy. Geek Squad has enabled Best Buy to move beyond a highly commoditized marketplace and develop new elements of brand loyalty in a fun and tastefully articulated way.

Although Professional Services is not a new model, other leading retailers including Circuit City and Dell have offered services for their increasingly technical products, in some cases using subcontracted or outsourced services providers. Firms considering this approach should be very aware of the amount of control they can have over these resources as response times and quality can vary significantly, putting your firm’s reputation in jeopardy.

If expansion into Professional Services is well thought out, properly capitalized, and thoughtfully integrated into the “core” business with appropriate controls and performance measurements, it can be a significant addition to your growth strategy. These are not matters to be trivialized as Professional Services has significant potential to change the way you are perceived in your marketplace. Failing to consider it as an option could limit your future options in a constantly changing and increasingly more competitive marketplace.

Here’s a few tips that can help you decide how to approach the market with a new Professional Services offering:

1. Take the time to determine what your marketplace is, and what they are seeking; it may be broader than your initial impression. Although “Geek Squad” was originally a provider of PC and networking services, Best Buy knew that their customers had other needs. Thus, they tweaked the offering and expanded Geek Squad’s “Problem-solving missions” to include any electronics -- not just Best Buy purchases.
2. How you package and promote your service is important. Does your offering look like all of the other “me too” Professional Services programs offered by other vendors, or do you have a unique “value proposition” and visible identity? Geek Squad put a lot of thought into this. In a parallel universe, the pest control business, there is a chain called “Truly Nolen” who’s service fleet consists of bright yellow VW beetles modified with oversized whiskers, ears and tails, leaving no doubt as to who they were and what they do.
3. Be absolutely clear about the economic model for Professional Services in your business. Understand your cost basis as well as how Professional Services investments and profits relate to the other “traditional” parts of your business, so you can project “how” Professional Services is supplementing your business strategy.
4. Getting into the Professional Services business can be difficult and risky. Consider conducting a “make-buy” analysis based on whether your company has the knowledge or experience to build-from-scratch or operate this type of business. If any doubt, it may make more sense to buy a proven player as Best Buy did and integrate them into your business model. Not only will it save you many headaches, but it can help you quickly achieve the “critical mass” you need.

We’d love to hear about your experiences with Professional Services. You can email these and other comments to info@bekteam.com.

Jim Kissane is a partner with RSViP Inc, which enables growth-focused business owners, through professional assistance and access to new sources of capital. He can be reached at JimK@RSViP.com.

Next month's topic: To Beta Test or Not…

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