03.05.09

Service revenue is financially relevant…really?

Posted in Service Innovation at 10:56 pm by Doug Morse

Service revenue is financially relevant…really?

Could it be that it takes a financial meltdown for Wall Street analysts to get religion about service? Are companies actually coming out of the proverbial closet and revealing the well known fact that a majority of revenue and profit comes from their service business? Whatever the case may be I, for one, am delighted that the service financials are now coming into the spotlight. Hallelujah!

I read a blog today about Oracle Corp. on a Baron’s blog site: (http://blogs.barrons.com/techtraderdaily/2009/03/05/oracle-street-pounds-the-table-but-cuts-numbers/?mod=yahoobarrons) that questioned the upcoming Q3 financial results based on a potential for a slowdown in new license sales. Then I read a quote from Goldman Sachs analyst Sarah Friar that said:

“We continue to view Oracle’s earnings as some of the most resilient in our coverage group,” she writes, “given the company’s sticky, high-margin, maintenance revenue, which now accounts for about 50% of total revenue.”

I do know that Oracle has been more transparent about this lately but the fact that the analysts are actually starting to evaluate companies’ service revenue is a huge change for those of us who have been in this business for awhile. Certainly IBM has gotten recognition in recent years, but then they declared themselves as a services company many years ago. Oracle talks about software innovation, not service innovation.

If you do the rather simple math; any technology product oriented company that offered maintenance or support contracts tended to see the revenue annuity streams from service exceed that of their product revenues in an average of 10 years. (software faster than hardware ) A recent article in the Wall Street Journal discussed GE service revenue now being 75% of their industrial revenues. Years ago, Autodesk went from selling boxes of software to selling software subscriptions. This blended combination of software and services created an annuity stream that helped to double their stock value.

One of the concerns that we have today in service research and innovation is the lack of investment for services R&D. The strategy in most companies seems to be to just milk the cash cow for as long as possible. Inevitably the tides will change and companies will be forced to be more innovative in services to drive value growth and cost efficiencies. With greater spotlight from Wall Street analysts, perhaps companies will start to put forth their strategy for optimizing this major asset. If I worked for Goldman Sachs or other analyst firms, I would certainly question companies about their R&D investments in both product and SERVICE areas. My own research has shown that R&D spend on service (in balance ) is a good indicator of future financial performance.

JB Wood, CEO of the SSPA, has spoken often about the importance educating Wall Street and company CEO /CFO’s about service economics. I personally have been contacted several times by leading financial firms to give my opinions about companies and their service financials and leading trends. I find this all very exciting. Is it a trend? Is it a natural growth of Wall Street? Or, did it take a crisis to hunt for the bright spots that we, as service professionals, already knew about? All I can say is…ABOUT TIME!

As long as I am on my soap box I want every University to know that when they teach finance and economics they had better be teaching Service Economics and Service Finance if they want their students to get good jobs upon graduation or I am going to start charging them for the OJT required to make them useful…;->

That is MY opinion, what is your?

Doug Morse, Services Transformation and Innovation Group LLC.

03.04.09

Wall Street Recognizes Service…sort of.

Posted in Service Innovation at 2:34 am by Doug Morse

Wall Street Recognizes Service…soft of.

Today, 3 March 2009 the Wall Street Journal had an interesting article on GE’s focus on service and how it now represented 75% of their $85 Billion in revenues from their industrial operations. You can find the article, “ GE’s Focus on Services Faces Test “ , on page B1 of today’s paper or online at http://online.wsj.com/article/SB123604076033514845.html?mod=article-outset-box.

The article by Paul Glader, was interesting on several fronts. First, it is good to just see an article about how important services revenues and profits are to big companies in the Wall Street Journal. If you are reading this blog, chances are this is just preaching to the choir, but it IS significant. One of the problems we have today is the fact that while revenue and profits from service represent a major positive segment of most good companies’ financials, the stories are seldom told. In this case, the story might have been just about GE jet engines and that business segment without the service angle. So, kudos to Paul Glader for getting it. We need more mainstream financial press talking about the service sector. (perhaps NOT Financial Service just now…but..) Wall Street analysts do not see service, especially within old world industrial companies, as significant. This is thanks in part to SIC and NAICS codes and how financial data is parsed but also because the conversations on Wall Street are mired in the industrial age.

The second interesting part was about how GE and others were investing in service to make it more efficient. Again, this is significant to recognize and then call out. When we, in the SSME (Service Science Management and Engineering ) community, talk about service innovation or service systems innovation some may not see the practical next steps. In GE’s case it was simply about improving the tools used in the service that increase speed and reduce labor. This is an important part of service innovation. How do we increase the value yield of services without linear increases in cost of resources?

The third item that I found interesting was that GE had consolidated their aviation services business into one business unit then appointed a “customer service and marketing specialist” from GE’s financial services business. Imagine that, an experienced service executive appointed to run a major business line. Who knows, next we might see service people becoming CEO’s. Of course the major difficulty in service professionals becoming CEOs of large companies is that they are inherently honest, seemingly a trait not sought after in this job role. (sorry cheap shot… )

The way this article is written, the service angle might not jump out at you if you are not a service junkie like me. I do not know if Paul Glader intended for the article to be so cleverly written or not. Different people will take different interests and facts from the article but it is a great example to share with others about one small part of the service story. Perhaps YOUR company’s service story could be written about in the Wall Street Journal. Use this article to get your PR department excited. We need more main stream press about the importance of service for companies and for the global economy. At least that is how I see it.
Doug Morse