Selling Services When Nobody Has Any Money To Spend

by Todd Youngblood

Like the rest of the economy over the last two years, the services sector has suffered a few setbacks.  Since it doesn’t appear that the macro economy is ready to make it easy on us, we all need to reexamine the micro-economy represented by our own businesses to ensure continued revenue growth and profitability.  The best way to start is to take a look at the five most critical portions of the business process for services.

Over time, many successful service providers have found that a focus on Sales, Service Design & Development, Finance, Service Delivery and Quality Assurance is fundamental to success.  Each of these in turn has its own core components.  Invest a week.  Spend a day taking the pulse of each piece and think through how you can improve the health of your services business.  Following are some thoughts to help jump-start your thinking.

Monday – Sales

Services sales reps need different skills than reps who sell products, and the ability to quickly segment prospects according to their likelihood to buy is foremost.  Using a 2 X 2 matrix to map them into four quadrants according to “Propensity to Pay For Services” vs. “Value Perception” simplifies doing this.  The diagram below illustrates:

With a few simple, direct questions, a prospect’s service buying history can be determined.  If their expectation is “service comes as part of the product price”, they would rank low on the vertical “Propensity” scale.  If they typically expect services to be unbundled and priced separately, they would rank high.  Similarly, if they perceive value to flow strictly from a product or service itself, they would fall on the left side of the “Value Perception” scale.  If they intend to leverage as much of your firm’s knowledge and capabilities as possible, they’ll fall to the right.

Clearly, those who land in the upper right quadrant are the best – and most demanding – services prospects.  Those in the other quadrants should by no means be ignored.  They just need to be treated differently.  A “lower left” does not (and probably will not) think much about the value of service add-ons.  With them, stress features, functions and “pricing for the highly knowledgeable buyer without any fancy extras.”

An “upper left” does not care much about or understand the business or technical nuances that you bring to bear, but is willing to pay.  For them, define your services very clearly and stick strictly to what you promised and no more.  You won’t get credit – or paid - for going above and beyond.

The “lower rights” are the toughest to handle.  They’re savvy and want to get all they can.  With them, lay out a detailed business case and show them how to save money by doing some of the work themselves.

The key point about prospect segmentation is to know what you are dealing with.  Don’t fight City Hall.  Sell into what they want.  Wearing your “Partner” hat when talking to a “Bare Bones” prospect will frustrate you both.  So will any other mismatch.

Services sales reps must also become highly skilled at understanding and working with processes and business process engineering.  Unfortunately, this is something rarely taught in any sales seminars. While a lot of detail on this topic is beyond the scope of this paper, almost anyone can execute “ABC Selling,” the shortest path to a grasp of the basics. 

ABC refers to Activity Based Costing.  (…a concept well known by your accountant)  Train your reps to develop before and after cost scenarios.  This begins with thinking through and writing down each and every step – in painful detail – that the prospect must currently execute to achieve a given objective.  Next, get an estimate of the time spent by the person who executes each step, along with what that person is paid.  There could be multiple people involved, probably many more than the prospect would guess.  Do the multiplication and addition to determine the total “before” cost. 

Next, do the same type of calculation for the “after” scenario, when the prospect is using your products and/or services.  The result is an “ABC Analysis” that clearly shows how your solution is more cost effective.  (Send an e-mail to info@ypsgroup.com requesting our basic ABC spreadsheet tool, and we’ll send you copy.)

Given that services can and usually are extremely complex and highly customized for each customer, a services sales rep also needs outstanding writing skills.  Talk about something not commonly taught at sales seminars!  A rep MUST be able to clearly and concisely write down exactly what service will be delivered at what price and when.  The document must include all of the bells and whistles and must be easy to understand.

Here’s your TODO…  Make The Elements of Style by Strunk and White required reading.  In my opinion, it’s the best tutorial on writing ever written.

Tuesday – Service Design & Development

Be honest with yourself.  You think you and your company can do more than you really can.  That’s not meant as a cut.  All successful business people have the exact same attitude.  It’s a requirement.  If you’re not careful though, in a services business it can kill you.

You need a tool to guide yourself and your team with a reality check.  Again, a 2 X 2 matrix is a great help.

This time, the vertical scale shows how much of the responsibility for actually doing the work belongs to you.  The horizontal scale shows how much of the management responsibility you carry to ensure that the work is done as specified, on time and on budget.

A pure consultant (like me) is a “Bottom Left,” providing nothing but knowledge.  Certainly quite valuable, but in the extreme case, a consultant doesn’t actually perform any of the work and has no management responsibility.  (…even though we still send you an invoice!)  As you move upward in the matrix, knowledge is applied to actually accomplish the required tasks.  As an “Upper Left,” however, you still do not worry about any of the management tasks.

The conductor of an orchestra is a great “Bottom Right” example.  He or she is ultimately responsible for the quality of the performance, but plays not a single note.  Another example is the “turnaround artist” who is hired on a temporary basis to take over a company that’s in trouble.  As soon as things are set right, the white knight rides off to the next big purely management challenge.

“Upper Right” outsourcing is quite common today.  Quite often it makes good economic sense to turn over total responsibility for an entire business process (Maintenance, Information Technology, Security, Accounting…) to an outside firm.

The farther “up and right” you go, the more money you can make.  Along with the cash, however, comes more complexity and risk.  As you design and develop services, use this matrix to keep your enthusiasm in check.  Like it or not, you must evolve slowly.  While the one-man-band entrepreneur really might have the knowledge to take over IT for General Motors, it just won’t happen.  In fact, the best strategy is to slowly and carefully migrate your firm either up or right in the matrix, not both directions at once.

The next core item to keep in mind regarding Service Design and Development is the Statement of Work or SOW.  It is the key document in a services deal.  It lays out precisely what will get done, by whom, by when and according to what specifications.  It must be read, understood and signed by both the customer decision maker and the responsible service provider executive before any work commences.

Please read the above paragraph three times.

Wednesday – Finance

Earlier, the importance of a strong working knowledge of Activity Based Costing for sales reps was emphasized.  The person who prices your services deals needs to be a legitimate expert at it.

It is very, very easy to under-estimate the effort required to execute a service.  It is very, very easy to assume that you will execute the service correctly, the first time, every time.  You’ll never need rework.  You’ll never misunderstand what the customer wanted.  The customer will never change his mind about what is required after you have started work.  Right…

I’ll never forget a lesson I learned from one of my services mentors.  Although I had 15 years under my belt as a product sales guy, it was early in my services career and I had never even heard of ABC.  I found a deal.  I researched the heck out of it.  I checked and re-checked the specs, the requirements and the skills needed.  I did everything.  I had it priced to produce a 35% net margin. 

Next, I reviewed the proposal with my mentor who said, “Excellent job.  Don’t change a thing except for the price.  Double it.”  I was stunned (…and insulted).  But, I doubled the price, delivered the proposal, won the deal and ultimately got only an 8.3% net margin. 

Enough said on ABC and pricing? 

The second point regarding Finance revolves around value.  Value has absolutely nothing to do with what it costs you to deliver a service.  There are two key points to keep in mind.  First, services are based on the knowledge required to execute a process.  Second, the value of knowledge varies immensely over time.

New knowledge can be worth a fortune.  The price one can charge for common knowledge is essentially zero.  You would probably be willing to pay a safecracker  $100,000 to open a vault that contains $1 million.  What would you be willing to pay if you already knew the combination?  Companies pay thousands of dollars to train their people on how to use new computer software.  What would they be willing to pay if the staff already knew how it works?

If relatively few people have the knowledge required to perform a service, a value-based pricing model should be used.  That is, if a service will save the customer $1,000, it would be logical for them to pay $900.  Even if it only costs you $10 to provide the service, the customer is better off. 

If, after a few years, a very large number of people have picked up the knowledge to provide that same service, a cost-based pricing model will become necessary.  At that point, with anything more than a $13 or $14 price tag, you won’t make any sales.

The trick to maintaining your profitability is to properly manage the transition from value-based to cost-based or commodity pricing.  Move too quickly and you leave money on the table.  Move too slowly and your competitors will outbid you and take the business.

“Gainsharing” is one very useful technique in this regard.  Tell the customer - right up front - that while the initial price is $1,000, you intend to share the benefit of any efficiency improvements.  Take $1 off the bill for every $2 you save.  Set up regular checkpoint review meetings.  Not only does that keep the price at a competitive level, from a sales viewpoint, it also provides additional opportunities to build customer relationships and discover new and additional opportunities.

Thursday – Service Delivery

Even if the designer/developers and finance folks are comfortable that a services deal will be profitable, the pricing job is not quite finished.  Many times the designer of the service is not the same guy who actually performs the service.  It is essential to have a “certification” step before setting the final price so that the “doer” has a chance to make sure that the designer didn’t miss anything.

This certification should consist of a “war room” meeting that includes Sales, Design, Finance and Service Delivery.  The agenda should consist of a thorough review of the entire deal and a formal signoff by all parties that indicates, “we have thought of and included everything possible to ensure that we can both satisfy the customer and make a reasonable profit.”  Only then should the deal be proposed to the customer.

As your company becomes more sophisticated at delivering services (i.e. process management), delivery teams can be assembled from a greater number of sources.  For example, you may be trying to win a contract to provide maintenance services for all of a prospect’s electrical equipment.  You might discover that they are also looking for maintenance of hydraulic equipment and their conveyor system.

Even if the expertise of your employees is electrical-only, you could submit a single proposal to handle all three.  By forming an alliance with a hydraulic contractor and another with a conveyor company you could provide a single-source total solution.  The customer reduces the number of vendors from three to one.  That’s good.  Your two partners don’t have to invest in a sales effort; you’re already in there.  That’s good.  You get a bigger deal and a piece of both the hydraulic and conveyor profits along with the electrical dollars.  That’s even better.

The key is your SOW skill.  Remember Statements of Work?  It might make sense to read that paragraph a few more times.

You could object to this “general contracting” approach because it violates the “stick to your knitting” rule.  It does.  If, however, the service you provide is getting more and more commoditized, you are driven closer to a cost-based pricing model and your margins will be shrinking.  (NOTE:  All services become more commodity-like as the knowledge required to execute them becomes more common.  It is inevitable.)

The ability to combine services from multiple providers into a single, integrated package delivered with high quality will become a core source of sustainable competitive advantages for a services company.  Get good at it.  Now!

Friday – Quality Assurance

The objective of Quality Assurance is to relentlessly drive the continuous improvement of every process in your company.  Especially for the “Monday through Thursday” processes just discussed.  The key tasks are to set standards, measure and communicate.

QA is not about intrusive inspection.  It’s about accountability.  It is the leader’s responsibility to set the standards and establish a culture where consistently meeting those standards is expected.  It must all be very objective, unambiguous and not subject to opinion.  Here’s the target.  Here’s how we measure it.  Did you/we meet the target or not?  If yes, there’s no need to talk about it further.  If no, what was the ultimate cause of the problem and what will we do to prevent recurrence?

The “war room” concept mentioned earlier is an excellent vehicle for the communications part of QA.  War rooms consist of regularly scheduled meetings where all key functions of the organization are present, reports are reviewed, problems and opportunities are discussed and decisions and commitments are made.  (For an excellent real life example, read the “Accountability” chapter in Rudi Giuliani’s book Leadership)

QA is really not at all difficult.  It simply requires relentless persistence on the part of the company leader in pursing perfection.

One final note…  Since knowledge is the foundation of services and the source of their value, gathering and creating it is the most important process.  Every individual in your company must be committed to Learn – Learn - Learn!!!

That’s it!

Nothing to it!

Well, not really.  Clearly, there is a lot more to sustaining growth and profitability from services.  By keeping this “handful” of sub-processes in mind, however, along with a methodical customer focus, you can stay a step or two ahead of the competition. 

Sales, Service Design & Development, Finance, Service Delivery and Quality Assurance…

Think about it…