One of the topics that I see being debated most often within the Customer Success community is whether or not the Customer Success organization should be a “revenue center” (by which I mean a profitable concern that brings more back in revenues than it costs in expenditures). I say “often debated” but I would not say that there ever seems to be much debate and the arguments all tend to be on the one side, that side being the “Yes it should be” camp. It’s rare that I see an even-handed discussion on the topic, and rarer still that I see an article or white paper written that comes down firmly on the side of “No it should not be”.
The purpose of this article then is to try to even things up a little by putting forward the opposite argument to that which the prevailing majority appear to be signed up to. In truth I am not trying to convince you that your company’s Customer Success organization should be a Revenue Center or not – after all, I do not know your company and I do not know you, your colleagues or your vision and strategies. What I hope I can do though is at least present the “case for the defense” – in this instance the defense of the idea that it’s OK for Customer Success to cost money. Hopefully, this will help you make up your mind as to what may be right or wrong for your specific business.
The Case for a Profit-Driven Customer Success Organization
As previously mentioned, those that say that Customer Success should be profitable in its own right really do seem to make up the majority these days, and increasingly so it seems. The basic argument seems to boil down to this… Sales is taken seriously by the rest of the business (and most importantly by the senior management team) because Sales brings in revenues. The reason why Customer Success is not given the same degree of respect and reverence and not treated with the same level of importance as Sales is because Customer Success does not bring in revenues. For the business itself and for the senior management team to take it seriously, therefore, all that needs to be done is for Customer Success to do what Sales does and start showing a profit.
Those that accept the above argument often go on to say that not only does this make logical sense, but it also is very achievable. Sales can look after net new business (ie the Land sales motion) and Customer Success can be responsible for retention and growth (ie the Expand sales motion). Because they are chasing different types of opportunities, these two parts of the business can both have revenue targets and can co-exist happily together without a need to compete or get in each other’s’ way.
(If you’re not sure about Land and Expand sales motions, this article on Forbes.com explains it fairly well.)
With this model (its advocates tell us) everyone is happy.
- Customers are happy because they are getting high-quality service from dedicated professionals who are specifically responsible for their part of the customer journey.
- Sales is happy because it is empowered to do what it does best – tracking down new opportunities and submitting business proposals to support new requirements.
- Customer Success is happy because it also is focusing on its area of expertize – that of helping customers to realize the value from existing purchases – and in so doing can sell the renewal of existing services and even sell greater quantities of these services, now that the customer has the confidence behind them of proof of value from their existing purchases.
- Finally the senior leadership team is happy because they can easily measure the ROI on their investment in the company’s Customer Success organization to prove how much (or how little) value it is returning to the business and therefore to justify their decision as to whether or not to continue investing in it – no mean accomplishment in these difficult times where for many businesses every penny must be scrutinized carefully.
The Logical Fallacies in the Reasoning
As we have seen, one of the core arguments in favor of Customer Success being a Revenue Center is the reasoning that the rationale for why Sales is taken seriously is because it is a Revenue Center, and therefore if Customer Success wants to be treated the same way as Sales, it too needs to be a Revenue Center. To my mind, this argument is illogical for the following two reasons:
Sales is not responsible for revenues
Let me repeat that just to be clear – Sales is not responsible for revenues. Actually Sales is not even entirely responsible for sales. Instead, all parts of the business are collectively responsible for the business attaining its sales. Sure, Sales will write the proposal, Sales will calculate the Bill of Materials, and Sales will negotiate with the customer’s stakeholders to close the deal. And for sure these are important activities that are difficult to do and that need to be well-rewarded – you will have no argument from me there.
But when you come to think about it, there’s a heck of a lot of other stuff going on here that Sales does not do but without which there would still be no sale. For example: R&D need to determine a market need and innovate a solution to fit that need, Product must develop and manufacture or deliver the product or service, Marketing must make prospective customers aware of the solution, Product Support must help the customer identify and overcome problems, Legal and Finance must arrange and approve purchasing terms, and so on, and so on, and so on. Without any of the above happening, what is it that the Salesperson could sell, and who could they sell it to?
The ability to make a sale is not all due to the activities within the Sales team, but is the product of all parts of the business coming together to deliver the solution to the customer that enables the customer to sign the contract. Sales just happens to be the team that issues and negotiates that contract. Again, this is not to say in any shape or form that Sales is not an essential aspect of the business, nor that they do not do a difficult job as it is important and selling is not easy (for all sorts of reasons that we will not go into here).
In short, Sales has my respect, but Sales is not responsible for the company’s revenues. In reality, all parts of the business combine to generate a “value proposition” that customers find attractive, and this (and only this) is the true reason why revenues can continue to be generated.
Put even shorter, revenues do not come from Sales at all, they come from Customers.
It is not the case that the only way to be taken seriously is to become like Sales
The second logical fallacy is even simpler. The reasoning of the “Customer Success should be a Revenue Center” contingent is that Customer Success needs to mirror what Sales does to be “taken seriously”.
The obvious question would be “why?” or if true then “why doesn’t every department and function need to become like Sales in order to be taken seriously?” Should HR turn a profit? Should Operations show a positive ROI? Does Buildings Maintenance need to balance its books? No of course not, this is not how businesses work. Not at all, and to think it does is preposterous. Having a Buildings Maintenance team is a cost to the business, but surely no one is saying that we should stop maintaining our buildings. In just the same way, HR does not submit any invoices to our customers for their work, but that doesn’t mean we should stop employing our HR specialists to manage the vital processes of recruitment, training, retention, and discipline, etc. Clearly not!
In short (once more) to be successful a business needs a wide range of organizational functions to be fulfilled. Sales is certainly one critical function but it is far from being the only one, and no one is suggesting that any other part of the business needs to “be like Sales” because quite obviously this would not be workable. Every team, department or function is different, and it needs to operate each according to its own needs and requirements to fulfill its specific duties in the most efficient and effective way.
Customer Success is still the New Kid
I believe that the underlying problem is that of Customer Success maturity and measurement and ultimately of justification of the existence of the Customer Success function to the rest of the business and in particular of course to the senior management team.
Customer Success is still relatively speaking the “new kid on the block” and for many companies it is still finding its feet and perhaps even jostling a little for a position within the overall team hierarchy. For example, people often want to debate who the Customer Success leader should report to. Some think that they should report directly to the CEO, some would say the COO, some would say Customer Success comes under Product, others suggest Marketing, and I get the feeling that in some (hopefully few) organizations at least some function heads just wish it would go away altogether!
For many organizations, the reality is that however genteelly it is happening, there is a power struggle going on between Sales (and particularly any Account Management aspects of Sales) and Customer Success, and sometimes with Marketing as well, and this struggle can inevitably cause friction from time to time.
Generally speaking, Sales (and Marketing) has been around for longer than Customer Success, and what is more, the core functions of Sales are more clearly understood by everyone than those of Customer Success, and the ROI from Sales activities is more easily measured than perhaps any other department or function. As a result, it is my personal belief that in many businesses where this friction exists, Sales will come out on top in this “genteel battle for importance”. I mean, everyone knows that you cannot run a business without Sales, right? That would be ridiculous! The same argument goes for Marketing too. And equally, everyone knows that you can run a business without Customer Success, don’t they? After all, that’s what we always used to do before we had a Customer Success team!
Addressing the Imbalance
Given this potential imbalance where as the new kid Customer Success finds itself having to work harder than perhaps most if not all other departments to justify its existence whilst simultaneously having less maturity, fewer resources (including but not limited to funding), weaker relationships with other parts of the business and less ability to prove its ROI in cold hard cash terms, perhaps the senior leadership team need to step in and help the (often more junior or at least more newly arrived and less politically powerful) Head of CS to address this situation.
It’s not possible to give a “one size fits all” recommendation about corporate hierarchy that’s going to work for all (or even most) businesses, simply because businesses come in so many different shapes and sizes and have such different requirements. But a start point for most smaller SaaS companies (for whom Customer Success will almost certainly be a vital function of the business, due to renewals being equally as important as new customer acquisitions) might be to consider appointing a VP for Customer Success and have that person report directly to the CEO and be on an equal level to the VP for Sales.
In larger companies and in non-SaaS companies where the focus is more on overall customer experience rather than customer renewals, it might work better to appoint a Chief Customer Officer (CCO) that reports to the CEO and that also sits on the Board of Directors, and have a Head of Marketing, Head of Sales and Head of Customer Success each reporting at an equal level to this CCO. This provides for overall authority and therefore a joined-up strategy for both pre- and post-sales aspects of the customer journey (something that your customers will thank you for) and also puts these “three legs of the customer-facing stool” of Marketing, Sales, and Customer Success on an equal and balanced footing.
To my mind both of the above management models enable collaboration and co-operation between and within departments, making for greater efficiency, higher productivity, and a better quality customer experience. However I realize that it is easy for me to write what I think in this article, but it’s not always so simple to make senior management changes on the ground in the oftentimes much messier reality of a specific business situation.
Step One then, is to address the issue of imbalance and (hopefully) restore a working equilibrium where everyone recognizes the important role that both they within their function and all their colleagues within all the other functions play in developing the company’s value proposition. Hopefully, everyone will then also recognize that revenues come from the customers not from the Sales function and that these revenues are only generated by all aspects of the business combining to generate this value proposition. Doing this should ease the pressure from Customer Success, which should not be made to feel under pressure to be or act like Sales or indeed like any other business function.
Measuring True Customer Success… Activities and Results
So, if Customer Success is not going to be treated like another Sales function and measured by the revenues it brings in, how should it be measured? Sales is measured in the amount and the quality of the sales it generates for the business. Likewise, Customer Success should be measure by the amount and the quality of success it generates for the business’s customers. There, I’ve said – the ultimate taboo – Customer Success needs to stop being measured and judged only by sales data such as renewals, and start being measured and judged much more on the levels of customer success it helps to generate.
I realize that’s not an easy sentence to swallow. It goes against everything everyone else says and it completely screws up all the data currently being collected and reported by the oftentimes very expensive CRM and Customer Success software platforms. I understand this and I am very sorry, but this is my position. If you are reacting with incredulity and/or cynicism then I do empathize and all I ask is to please suspend your judgment for a few paragraphs and allow me to explain why I believe this to be the case.
To understand what to measure we need to understand the concepts behind measurement. There are two types of things that can be measured – activities and results. Activities happen first, and sometimes those activities need to go on for a fair amount of time before results begin to appear. So the rule is “Activities come first, followed by results”.
Let’s turn our attention away from Customer Success and take a look at Sales for a moment. Again, let’s consider the difference between activities and results. What activities do the Sales team perform? Well, no doubt the details of what the Sales team do is wide and varied, but perhaps in essence and at a high level we could group their activities up into a few categories such as prospecting for new customers, engaging with prospects to understand their needs, proposing solutions to fit those needs, and finally closing the deal to make the sale. Think of it as a funnel – the more prospecting you do, the more prospects you will be able to meet. The more prospects you engage with, the more needs you will uncover. The more needs you uncover, the more proposals you can submit. Finally the more proposals you can submit, the more deals you can close. Simple. Well OK, there are many twists and turns and nuances and if it was that easy the selling would not be the high paid position that it is, but the general principle is true. Still with me? I hope so.
Now let me ask you this – given the above as our basic model for sales, how would you go about predicting the amount of sales revenues we should anticipate to receive over say the next twelve months? One way we could do this is to measure actual revenues as they come in. The problems with this approach however are twofold. Firstly, they are slow to arrive and they only come in (and therefore can only be measured) after everything has happened, as is the nature of results (activities first, then the results, remember?). Secondly, the revenues we are obtaining now are largely if not entirely due not to the activities the Sales function is performing now, but to the activities that this team were performing perhaps six to twelve months ago. So if the Sales team is doing more or less prospecting, or engaging or proposing than it used to do then we can also expect a change in the amount of closing it can do and thus we should also anticipate a similar change in the amount of revenues we should expect to see in the future. Put another way – future revenues are not the product of existing revenues, they are the product of existing (and future) activities.
So the correct way to take measurements to predict future sales is in fact not to measure current revenues (today’s results from previous activities), but instead to measure current activities. This is of course vastly over-simplified and in reality we need to measure both leading and lagging indicators (ie both activities and results) to build up the best possible prediction of future results and then to validate actual performance as well. But I hope you get the point. If you want to predict future value you have to measure current activities not current results. Current results simply confirm the value of our previous activities (again an oversimplification, but holding enough truth to be useful within the context of this discussion).
Let’s take a soccer match for example. Maybe the game has been going for around 20 minutes but so far neither team has scored a goal, so in terms of results currently it’s nil-nil and of course that doesn’t tell us much. But perhaps if we examined activity we might see that for example, Team A has had 80% of possession of the ball and eight scoring opportunities, whereas Team B has only had 20% possession of the ball and no scoring opportunities. This gives us a much clearer picture as to who is most likely to win the game.
Leading and Lagging Indicators for Customer Success
How does this concept of leading and lagging indicators (i.e activities and results) translate into the world of Customer Success Management? Quite simply, renewals, NPS scores, and CSAT scores are (generally speaking) the Customer Success equivalent of deals closed in the world of Sales, and they come at the end and can be considered to be results. But just like we saw a chain or process of activity leading to results within sales such as prospecting, engaging, proposing, and finally closing we have the same thing in Customer Success. And just like these activities make for excellent leading indicators of future revenues (ie net new business) in Sales, so these Customer Success activities make for excellent leading indicators of future revenues (ie renewals) in Customer Success.
But what about the leading indicators? What Customer Success activities should we be measuring? My suggestion would be to again apply the concept of a funnel or process or journey of activity, just as we did for Sales. For Customer Success I would suggest that these activities might be Researching to determine the customer’s success requirements, Engaging with the customer’s stakeholders to agree and commit to a package of help and assistance, Onboarding to get the customer up and going with the solution as quickly and painlessly as possible, Adoption Planning to help determine change management requirements, Adoption Implementation to project manage that change and Value Realization to measure and report on customer outcome generation.
Funnily enough, these activities correspond exactly to the first six of the seven phases to be found within my Practical CSM Framework – a best practice framework for the rapid generation of customer success within any organization. (The seventh phase being Engagement Evaluation where we determine what went well and what did not and learn lessons to help us improve the quality and efficiency of our Customer Success service for future engagements.)
If interested, you can learn more about the Practical CSM Framework and how to implement it in my book Practical Customer Success Management, published by Taylor and Francis and available from Amazon and all major book stores. Also if you contact me I will be happy to send you a free PDF of Chapter 1 of my book, together with a free 22 page Practical CSM Framework Overview PDF. Just reach out to me at [email protected]