One of the Biggest Mistakes Enterprise Startups Make

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professional services repEditor’s Note: This is a guest post by Mark Suster (@msuster), a 2x entrepreneur, now VC at GRP Partners. Read more about Suster at his Startup BlogBothSidesoftheTable.

The era of VCs investing in successful consumer Internet startups such as eBay led to a belief system that seemed to permeate many enterprise software startups that hiring sales or implementation people was a bad thing.

“We want low-touch or zero-touch businesses” was the mantra.

I believe it’s flawed.

While I have some sympathy with not investing too heavily in sales people until the product has properly been tested and commercialized in the enterprise environment, in the end it’s a fact that it takes sales people to move product through large organizations. And of course the most successful technology companies: Google, Facebook, Salesforce.com [duh], Oracle, Microsoft all have loads of sales people.

But the “no sales people” mantra isn’t what I’m here to take on. It’s the second belief system that is even more engrained and even more wrong. Many young startups are being advised not to have a professional services business and in my opinion, this is a big mistake.

The line of reasoning goes, “Services businesses are not scalable and the market won’t reward this revenue so make sure that third-parties do your implementation or clients do it themselves. We only want software revenue.”

This is a huge mistake. If you’re an early-stage enterprise startup services revenue is exactly what you need.

Let me explain why:

1. Successful Implementations
The most important way to sell a product for an early-stage business (or frankly any stage) is to have strong referenceable customers. These are the lifeblood of your sales organization. Referenceable means they are willing to be part of your sales collateral, willing to take calls from key leads, willing to speak at your conferences, etc.

How do you get referenceable customers? You build a great product and make sure it is used in such a way as to deliver real benefit to your customers versus just the promise of a benefit outlined in your marketing materials.

As much as many non-experienced investors might like to believe, even great products don’t just roll themselves out. You need to implement them. This often means getting the product to talk with other existing products, implementing the product to match the specific needs of a customer’s internal processes, training, monitoring usage and encouraging adoption.

It also means creating communication plans to make sure that there is a senior sponsor in the organization who knows what the benefits are, as well as measuring and communicating the gains.

This is vital because every rollout needs a champion (the person in charge of rollout) and a sponsor (the senior person who has the budget and who stops the blockers from killing the project). And that’s just it – every project has blockers. The people who either want to do nothing or who prefer a different solution.

Your project is forked without a rollout organization, communications, measurement, integration and without turning sales into referenceable customers.

Trust me – this will NOT happen without a dedication implementation team.

Professional services = higher rate of successful rollouts.

2. System Integrations
As outlined above, one of the most important things to get an implementation right is integration. Your system as a silo will not deliver the same impact as your system talking with your customers other systems. And you can’t use the API argument to get out of helping with integration. As in, “Well, as a tech firm we put tons of effort into APIs so that you can do your own integrations. We prefer to sell software, not get involved with client systems.”

This line of thinking is expressed to me all the time by startup companies that think it is a pain to have to actually work with enterprise accounts. They prefer to just “innovate” and not have the grubby work of actually making their innovation work with real customers.

Good luck with that.

Your customers will not dedicate the teams to build the integrations because they are not yet committed enough to your product or company. This will happen organically in the future but not until you’re already large and successful.

And the other thing: The more your product is integrated with other systems, the lower your churn rate will be. Imagine when your competitor comes in with their new whiz-bang features. Your customer sees it and thinks, “I wish your product did that” and you respond that you will have that feature launched in three months. But knowing that your competitor can’t get the integration done by then and your customer doesn’t want to go through the hassle of doing another integration – guess what – you will have a safe haven at that account.

Professional services + systems integration = lower churn.

3. Channel Partners Not Yet Formed
I’ve heard many investors / advisors tell startups to have third-parties do the implementations rather than doing it themselves. “You’re a software company not a services company! We like software. Software gooood. Services baaaad. Just have third-party VARs & SI’s do the implementations.”

Politely listen but ignore them.

Why would you have your most important success factor (successful implementations) outsourced to a third-party where you don’t control quality and who is strictly mercenary (i.e. doesn’t care as much about the successful outcomes as I do). I highly recommend this strategy for any company who doesn’t care about referenceable customers.

Here’s the thing: until your sales volume is sufficiently large, no self-respecting SI or VAR is going to commit resources to making you successful. By definition you will either get a crappy SI promising you they will move mountains or a great SI that gives you their C-player team. Think about it – why should a great SI with tons of work commit to you while you’re still a small company?

I wrote about that extensively in “the fallacy of channel partners.” When you’re bigger, channels play a very important role. But while you’re early? You need to control the sale and the implementation.

I call the argument many investors try to make on this point the “Salesforce.com argument” and it’s bogus.

People often cite Salesforce.com, “They don’t do their own implementations! They have a third-party ecosystem. And they’re the best enterprise company out there so they must know something.”

I worked at Salesforce.com. I can tell you this argument is wrong. Salesforce did have their own professional services / implementation team. Salesforce’s success as a company early on was because their earliest customers DID have success and Salesforce put a lot of energy into making that happen.

Only after Salesforce.com went public did they consider cutting back on professional services because Wall Street didn’t reward the lower-margin business as much as the software business. But Salesforce knew how important this process is to their success so they actively encouraged the development of an ecosystem so much so that they even invested in these third-parties to make sure they were well-enough financed to survive.

Don’t fall for the Salesforce.com argument from your investors. It’s false logic.

Professional services = higher quality implementation.

4. Your Best Eyes & Ears
What did I learn from nearly a decade of doing system integration projects at Accenture early in my career? Your most successful sales people are the people who are on the ground doing the implementations.

But they’re technology people not sales people!

Precisely.

They know your customers’ systems. They are trusted by your customers exactly because they are tech people handling the rollout and making magic happen. They know your product intimately. And they form meaningful, trusted relationships with your customers.

So when your relationship-sales rep wants to figure out how to get a broader rollout of your product (more seats!) or how to sell new modules to those customers or how to get the CEO to be a referenceable customer for you, look no further than your implementation team to help this rep get the orders they need.

They are the gateway to your growth.

Professional services = upsell + cross sale + new business units

5. It’s Profitable Revenue Covering Your Fixed Costs
And finally, the most obvious argument is an economic one.

It’s true that professional services have a lower margin (say 45-55% gross margin) than software (typically 85-95% gross margin) and professional services business are inherently less scalable.

So I’m not endorsing your building your entire company around professional services (although I think that’s a fine strategy for many non VC-backed companies) but rather not to avoid it.

Let’s say you can do $1 million in software sales in your first year of selling delivering $850,000 of gross margin. Let’s say you can supplement that with $1 million in professional services revenue at $500,000 gross margin.

Need I point out that the $500,000 is still profitable revenue that can contribute to your central costs of running your business?

That it is non-dilutive financing?

That it is the driver of your future software revenue for next year?

Professional services = profitable revenue streams that fuel your business continuity.

The key is to not become overly reliant on professional services. There are some clear do’s and don’ts for how to layer professional services into a software business.

And I’ll address those in my next post.

Until then, happy implementations.

[Photo: Flickr/KatanaZ]