The two questions CS leaders have to answer to survive

What’s your margin contribution for your company and your customers?

We are in the midst, or perhaps just the beginning of a sea change in B2B SaaS. Markets and investors are spooked and as a result are more and more focused on profitable growth, not growth at all costs. The cost of capital is no longer close to zero, as has been the case for the past 10-15 years. With the cost of capital now around 10% (convertible dept probably at 12%) funds for growth are increasingly expensive. Raising capital to cover your burn rate and extend your runway (how long before you run out of cash) is now both very expensive and increasingly challenging. Cash, or lack of it, is the one sure thing to put you out of business. That means budgets for anything are increasingly scrutinised against their contribution to profitable growth and existing budgets are pored over with a fine tooth combed to identify costs that can be trimmed. CEOs, CFOs and investors are now reassessing what was, until very recently considered important but nice to haves and becoming laser focused on must haves.

CS is no exception. I have not found any figures specific to CS but Forrester are predicting 20% of customer experience programs will be cut next year. Private Equity are adopting a benchmark for CS spend at 6% of revenue; a big difference from the 12-15% often quoted by the CS community.

The changing macro-economic environment reinforces the need for CS leaders to focus on two dialogues. They are not new but not enough CS leaders are really literate in them. That has to change and quickly.

The internal dialogue

The question CS Leaders have to answer internally is “What is CS’ margin contribution?”

In the past, justifying CS investment was easy. Once a delivery model was agreed, headcount and other resources grew in line with customer count. Too many CS leaders relied on the assumption that investment in building a CS department was an essential part of a SaaS business. Well now, that assumption, along with other operating norms across the business will be questioned. I have spoken to CEOs who are asking about the impact on churn and growth (NRR) of not having a CS department. ‘Accepted wisdom’ is no longer accepted at face value. The cost of capital, its impact on cash runway and the focus on profitability has changed that.

If your CS operation is not generating margin, you are a cost centre. And even if you are margin positive, the pressures on the business will lead to requests for more. CS has some great arguments in its favour: the lower acquisition costs for renewal and upsell revenue; the impact of NRR on valuations; the contribution of referrals (secondary revenue) and the need to deliver on promises made in the sales motion are just a few. But even if you are doing all this, if you are costing the business more than you are earning, you will deservedly come under scrutiny. For this reason, growing NRR is no longer the game. Growing profitable NRR is. I believe CS leaders will be we be better served by measuring NRR efficiency the cost to deliver each % point of NRR) and CLTV:CAC ratio.

How do you address this? The model CS P&L. P&Ls are simple: Income – Cost = Margin. I built one for my own B2B SaaS company and helped several others do this as part of my coaching work. Note: this is a pro forma P&L; it’s a tool to help understand the financial impact of CS, however you choose to define the scope of that capability.

Let’s break it down.

Revenue

  • Recurring subscription revenue
  • Recurring services revenue
  • One-off revenie
  • TOTAL REVENUE

Cost of revenue (Can be included in costs for a simplified model)

  • PS costs
    • People (See headings below)
  • Support (if part of the CS organisation)
    • People
  • TOTAL Cost of Revenue
  • CS Gross Margin

Costs

  • Staffing costs (CS, PS, Implementation, CS Ops)
    • Salaries
    • Bonuses
    • Employer Taxes
    • Expenses
    • Training & development
  • Technology
    • Software
  • Customer marketing
    • Content production
    • Distribution costs
    • Events
  • Other
    • Facility costs (space, core equipment ….)

Contribution

  • Margin contribution = Gross margin – costs
  • Margin % = Margin contribution/Total revenue

So what does this mean. There are some pretty clear implications.

The CS P&L will help you focus on profitable retention and growth. If you can’t track the data above, you have a problem. You are not in control of your business. Use your CFO to help you fix it.

If you do not directly own a number, you are a cost centre! On your head be it when the company starts looking to preserve cash.

The biggest cost element is always people. If the business is looking for meaningful savings to preserve and extend the runway, they will look here first, Productivity – how you can do more with the same or less is key. For me, productivity is about how we can deliver the same, or preferably better value for customers with the same or less resources. There is no trade-off: meaningful productivity requires both.

New products and features and how these are packaged and priced can change the top line but it usually takes time, which you might not have.

To repeat myself, this is not a ‘for real’ P&L but a very powerful tool for understanding and agreeing the financial expectation from customer success. It is richer than a budget, which tend to focus only on spend as it includes both income and costs.

I always run two, linked versions. The first is used to model how CS currently operates and how you want it to operate. This s your planning tool used during budgeting and periodic CS business reviews – typically quarterly. It’s a great tool for asking questions: “What’s the revenue potential of increased retention or upsell?” “What productivity improvement will we get from greater automation?” The real power comes from the discussion about how these changes can be made, generating a shared perspective on how actions can be implemented.

The second is the actuals, used to track performance and drive discussions around the progress of the changes to achieve or improve positive margin contribution.

The customer dialogue

Your customers are operating in the same challenging environment and probably having the same discussions: how can we maximise our cash runway and improve our profitability. Cost cutting is always quicker and easier than revenue growth so the larger the pressure on runway, the more this is likely to happen.

Your products and services are on the list of potential cost savings. How safe are you? I think that depends on two categories of factors:

Negative

There is always cost and risk associated with change. Incumbents benefit from this. Costs of change include training, adoption, integration and process change. Never underestimate the hassle factor in sustaining the status quo. We tend to prefer the easy over the best. Whilst real, these are all negative: reasons not to change but not meaningful reasons to stay. The greater the pressure on your customers’ costs the more these factors fade.

Positive

Positive reasons for change are primarily twofold.

The first, and I believe the most critical and influential is the recognition of the measurable value customers achieve from using your products and services. This operates on two levels: the measurable value achieved by the key roles you serve and how these benefits aggregate to achieve a measurable business impact, Not all will be financial. The important point is that they must be identifiable and of real importance to the individuals and the business.

Not all elements of value will be a direct result of your product. If you are on your game, you will be providing help, data and guidance on the broader issues of improving the domain of business you work in. This position of trusted advisor amplifies the value your product delivers. Beware; though this broader value is important, its impact wanes in the absence of measurable value attributable to using your product.

Rebalancing the see-saw

The financial situation has shifted the balance, increasing the focus and importance on the measurable value you deliver. If you cannot reliably and repeatedly prove, to the satisfaction of the key roles you serve (which will increasingly include your customer’s CFO) you are on the “potential savings” list.

I have been doing, advocating for and helping companies identify and report the measurable value they deliver for many years. Still, only a small number of CS leaders include measurable customer value as one of their KPIs. Do you? The tiny number that do is frankly staggering and a blight on the discipline. It’s a bit like a sprinter who doesn’t measure their times, relying instead on relevant but indirect measures like stride length, knee lift and arm cadence. They all contribute to performance but do not measure performance of what matters most – who wins. Too many in CS are happy to stick what they can measure – adoption, relationship strength customer health rather than what they must measure: what measurable value are customers achieving.

Let’s be clear, if you cannot show measurable value to your customer’s decision makers (which will increasingly include the CFO) and key users you will be in trouble. Key users are important because, if they can show they are achieving measurable value in the context of their role, they will advocate for you and you may well need all the help you can get.

The privilege of leadership

If you are not able to answer or not actively working on these two questions you are failing the people you lead. They rely on you to make their case for continued employment; to guide them on how to focus on the right things. When conditions change, it is the leaders job to lead, to adapt working practices and focus to what the changed situations demand.

Having lead a B2B SaaS company through previous financial crises, I can tell you it will be tough but one thing is sure. Thinking it won’t happen to you and your team is just sticking your head in the sand. It is abrogating your responsibility as a leader. I also learned one other thing. Hard times amplify what you should have been doing all the time.

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The robots are coming

The role of AI in Customer Success 2.0

It is one of the most talked about subjects in technology – artificial intelligence.  According to some, it is going to revolutionise the world.  Kevin Kelly (of Wired fame) describes AI as the second industrial revolution in an insightful TED talk.  This blog examines how AI will change the field of customer success; specifically the contribution it makes to the development of CS 2.0, where the product is at the heart of and the main delivery vehicle for customer success.

Let me begin with a grossly simplified view of the elements of AI.

Data capture and categorisation -> Machine learning -> Propensity modelling -> AI applications.

Data capture and categorisation

AI without rich data is an oxymoron.  Tools for smart capture and categorisation of data are the foundation of AI.  In the field of CS, a single customer view has always been; with the advent of AI is not optional.  Tools are emerging that capture data from documents and others that use AI to rate the quality of data.  And of course we are all aware of AI based intelligent assistants that recognise and respond to speech.  These will be used increasingly in a business context.

Machine learning

Machine learning is the automation of pattern identification in large data sets.  It answers questions like “What product usage data correlates with churn  are the characteristics and activities that correlate with retention?” or “What customer characteristics lead to churn?”

Propensity models

Propensity models use the patterns identified via machine learning to predict outcomes.

AI applications

These are applications of AI to do specific tasks.  These may be full automation of tasks or automation used to guide people in the completion of their work.

Here are a number of tasks where AI applications will contribute to customer success.  Many of these are already in use, although most are still a minority sport.

  • Conversational discovery.  Natural language interactions to collect information on the customer’s goals, challenges and modus operandum.
  • Customer ROI guidance.  Delivered in the application itself, AI will identify the actions a customer should take to achieve their objectives/desired outcome.
  • Personalised implementation plans.  On-boarding tailored to a specific customer’s situation and goals
  • Next best actions will replace playbooks.  Playbooks are typically a company’s interpretation of what a customer should do next.  Next best actions use more granular data patterns to understand context and suggest an action.
  • Customer health/engagement scoring.  AI driven health dashboards will improve the reliability of scoring and will self-adjust as continuous machine learning identifies changes in the underlying data.
  • Feature targeting.  Identify customers that can gain greatest benefit from new features and should therefore be targeted first.
  • Sentiment analysis. Discerning the behaviour and intent from the content and tone of customer conversations.
  • Upsell targeting.  Listing the customers most receptive to additional purchases and why.
  • Content curation.  Identifying the content which will be positively received by which customers.
  • Dynamic pricing.  Suggesting the best price for up-sells and renewals.

Here and now

I am not suggesting that these capabilities will be widespread this year, not even next but I think many underestimate the maturity, sophistication and speed of development of the technology.  Here’s a few things to take note of.

  • Research from IDC into the use of AI in CRM suggests that 55% of companies expect to have implementations (not pilots) established next year (2018).  This will generate additional revenue for the companies using AI of $1,100 billions by 2021.
  • AlphaGo, a Google AI programme beat the best two Go players in the world in 2016.   It was coached on how to play.  Its’ successor, AlphaGo Zero was just given the rules of the game and learned how to play itself.  It took AlphaGo Zero just three days to reach world beating standards using a fraction of the computing power.  Professional players say it uses moves never seen before.  This is what neural networks do and they do it far better and faster than people can.  Imagine giving an AI tool a set of business principles and letting it learn how best to deliver customer success.
  • AI tools are widely available and will become a utility within five years.  The IDC report above suggests spending on AI will grow to $46 billions by 2021.  That is more than the forecast market for CRM, itself one of the biggest technology markets. In November 17, Salesforce launched MyEinstein, a tool to allow administrators, not developers users to build their own AI applications.  Almost all customer success software has, or have plans for using AI in their applications.
  • Andreessen Horowitz, one of Silicon Valley’s leading technology investors believe that AI is a fundamental platform of the same order of importance as cloud and mobile.

AI and competitive advantage

Whilst the technology is vital, I don’t think it is the real source of competitive advantage.  Given its ubiquity, how can it be?  Sure, early movers will gain an advantage but technology that everyone has access to won’t sustain that.  There are two factors that will create the winning edge in the use of AI in customer success.

The first is data – the richness of the picture that companies can build about their customers.  Single view of the customer has always provided an edge.  AI provides the means to extract meaning out of much larger and more diverse data sets.  The more dots you have, the more patterns you can spot.

This is reliant on the second source of advantage; mutuality – a true customer first culture.  Mutuality is not just a belief that customer satisfaction or even their success drives what a company does but about taking actions that are good for the customer and the company.  It is about using the customer’s data to their benefit, not just yours.  It is about doing the right thing for the customer, not just selling them anything you can.  Customers will soon have the means to control access to their own data and will increasingly restrict access unless they can see something in it for them; unless they can see that the company is doing the right things for them.  Remember, it doesn’t matter how good your AI applications are, they are useless without data.

Changing CS

AI will radically change the customer success landscape.  Routine tasks will disappear: chatbots are already replacing the support team and that will extend into the simpler, routine tasks of customer success, particularly as more and more companies build this into their application.  So what of the CSM?  Well if they spend their time doing routine tasks like on-boarding, training and low-level process change; they will also go.  If they are change mentors, guiding people through the human aspects of change, then they will stay.  In proportion, we will need more of these.  We already do it is just that we can’t afford them given everything else a CSM has to do.

Make no mistake, AI will improve productivity and that will impact jobs.  In the early stages, AI will augment people but as confidence in systems grow, AI will take over some tasks.  Whilst I have concerns about individuals who won’t or can’t adapt, I am not fearful of the overall impact.  President John F Kennedy said “We believe that if men have the talent to invent new machines that put men out of work, they have the talent to put those men back to work.”  Throughout history, new technologies have changed work and jobs but the overall effect has always been growth.   People just do different things.  Question is, if you are in CS, what are you going to be doing?

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