Title of Survey: So what is a "Healthy" margin for a training business anyway?

Date Survey Initiated: December 2005

Person Who Initiated the Survey:
Name: Pat Durante
Company: Endeca Technologies, Inc.
Email: pdurante@endeca.com

Original Survey Question:

Had a hallway conversation with my CFO today and he asked me – “so what is a “healthy” margin
for the training business anyway?”

I didn’t have a lot of hard data in my head, but my gut sense made me say “5-10%” (recalling our
2003 CEdMA survey where 41% of the respondents replied <10% margin). Also, my personal
view on this is that Education is an “enabler” to software/hardware sales – so margin is important
(the education business can and should be profitable) – but a large margin seems out of line with
the mission of enabling software/hardware sales and customer success with our products.

I know there are a lot of dimensions to this question, but I’d just like to hear your gut sense – if
your CFO walked up to you and asked what your margin goal for 2006 should be – what would
you say? I’m assuming a P&L that includes all operating expenses as well as staff expenses
(salary and benefits of trainers/course developers/managers/edu sales reps/etc.)

Responses:

Doug Thomas [dthomas@salesforce.com]

Salesforce.com

Pat, it has been my experience that the margins are normally less then 25%. My experience has
been from 15-20%. If you remove the R&D [for course development] costs, you can get a margin
in the 40% level.

Jim Flanegin [jim@directedsolutions.com]

Cisco

5-10% is a 'healthy' margin, and after taking into account

infrastructure, development and resource costs, is harder to achieve
than it looks. Some training departments will claim a ~45% margin, but
they are not taking into account development costs.

Keith Ackley
keithlackley@aol.com

This is really a loaded question and one that you should be careful
answering. Training margin is calculated differently in every company I have been
with so any answer you get should be followed up by "so what goes into
that?" Furthermore, if allocations are included you might as well throw the whole
thing out because those are even fuzzier.
My suggestion would be to either ask your CFO what he would like to achieve and
then you tell him what it would take to get there. Alternatively, its much easier to
calculate a field or delivery margin which leaves out the allocations.

What's reasonable? really depends on the goals for the training operation.

My field margin target is 54% but, you need to know how we calculate it to
determine if this is a good target for you.

Edgerton, James [james_edgerton@mentor.com]

Mentor Graphics

I have such strong feelings about this that I may not be able to contain them. My fast answer, which reflects
your sentiment, is "why would anyone care?"

This is especially clear for software companies. The rest of the company holds to a business model where
80% margin is quite believable. This means we would have to sell 40 to 100 times as much training as
software to be considered a viable part of the rest of the business. Impossible.

Your comment is the right answer. The training should enable the customers to be successful with the
product. This leads to increased product usage and that leads to a series of benefits to the company. More
software in follow on order. More positive word of mouth advertising. More revenue from maintenance
contracts. The list goes on.

Your finance person should see your revenue as a method of paying for the effort. Not as a benefit to the
bottom line.

I know of one company that wasn't able to convince their finance people of this thinking. To survive they
let go of almost all of their FT employees and relied on other resources inside their company. This made
them look good on paper but in the real world they were a drain on resources that could have been used for
other things. Lost opportunity is hard to put on a spreadsheet.

As marketing manager I spend most of my time digging for revenue but I understand the real value of
training. It’s not in the margin.

Three years ago we started a campaign to establish the value of training to our corporate
executives. I still send out a quarterly e-newsletter to the top 50 people in the company (just
before the quarterly operations review meeting) writing about all of the wonderful things that have
happened to the company because of the training department. Anecdotes about an unemployed
worker we let into a class for free who got hired and recommended $200K worth of software for
his new employers. How our token program helped a large aerospace customer transition to our
newest software. Stuff like that. When Steve Mock's instructors deliver their class reports I
forward them to divisional GMs if they show a link between training and software leads.

I really expected someone to slap my wrist for being so brazen. On the contrary, we are better
known and appreciated by the executives than ever before. My boss has even had a vice
president come up and ask him for details about something in the newsletter.

I can't say that we are allowed to add headcount randomly, but at least no one is questioning our
value to the company.
I've finally gotten my company to stop asking for data supporting the notion that better trained
customers call less frequently. In our research the opposite seemed to be true. Because they are
better trained, they used the software more often and for more complex projects. This caused the
support load to increase, not decrease. Looking at all training customers across a four year
period, we found that almost 40% contacted customer support more frequently after being trained.
In many cases, they called support for the first time after they were trained.

The vice president of my division (customer support) has taken a different approach. He has
asked Steve Mock to develop training that includes a substantial element of how to find their
technical answers on our support web site. In this way, we will be supporting the business by
moving customers off the phones and onto the web site. Of course, it helps to have dumped
millions of dollars into a really good knowledge base and search technology first.

Kathleen Sullivan [ksulliva@interwoven.com]

Interwoven

You're right that margin is just one measure. We also calculate 'good
will' and send that to our CFO. That is, the value of employee training
(he does not believe in cross-charges) and the free training we deliver
to help sales out (usually to partners).

Eric Berglund [berglund@vmware.com]

VMWare

My flippant reaction (what? Eric flippant?) is that the right margin is whatever will keep Finance
out of my hair so that I can support the company's customers in the way I think best--for exactly
the reasons James cites.

And that if Finance thinks that a software or hardware company's services business--including
customer support, consulting, and training--is a dramatically important part of the business, then
the company is on the way downhill. Every failing tech company somehow thinks that it's going
to make it up on services. If that's what you're going to do, admit it and buy a big consulting
company, like IBM did.

But, as Jesse Finn said last CEdMA meeting, a business unmeasured is a business
unmanaged. We keep thinking we're making a contribution to the universe, but there are too few
numbers that really show that trained customers:
1) Buy more product,
2) Make few support calls, or
3) Are happier or more productive overall (and thus contribute to word of mouth).

So if we give flippant--or low-ball--answers, we'd better have a good story to tell based on some
other metric.

It occurs to me that it's about time that I offered discounts to customers who promise to serve as
subjects for market research and future marketing efforts. What I don't know is how I would
collect the difference from those who renege. Maybe I'd have to implement a rebate scheme. My
Finance department would love that.
Tom Kelly
Network Appliance, Inc.

Several good points made by everyone... one more opinion for the grist mill from another member
of the ed/training profession.
Margins are VERY dependent on Direct vs Indirect business models (assume Before Tax)..and
HW vs SW product lines
- Direct Training models (vendor has developers, instructors, facilities etc) can do 15-25%
reliably
- Indirect Training models (vendor has development, and outsources to partners) can to 40-
60% reliably (with dramatically less revenue)

BUT (as was already stated one way or another) the real value of the Training function is not in
training revenue (it will never really be large enough to justify it's existance on revenue and
margin alone). I've been part of 2 training businesses that were created over $500M annually,
and both times it was a rounding error at my employer's bottom line (the first because it was
direct, so low margin 22%), the second because it was indirect so the revenue was only $90M,
the rest went to the partners).. The first, we were a drag on the company margins, the second,
we were less than 1/2 of 1% of total revenues. Really good training businesses, but not important
financially to anyone.

Our real value, our importance is related to:

1. Increased competence of sales, resellers, and support functions. Ask the finance person
"would you rather increase Training Revenue by 50% or Sales revenue by 5%?" The real value
of Training in this perspective is in empowering the sales and support effort. Fund that differently
and succeed.
or
2. Increased Customer Satisfaction. Customers who have good training experiences are 3-4
times more likely to buy from that vendor again (IDC or Gartner, several years ago). Track this
differently than in the past and measure success in the ease of future funding requests..
or
3. Increased Customer Loyalty. Certified customers are 50-80% MORE loyal (satisfied, happy,
engaged, trusting, patient) than non-certified customers. Internal analysis at a previous
company, supplemental to a large and diverse customer satisfaction survey. Prove this and don't
worry about funding requests for 2-3 years.

It's true that finance should know and care about what we do and what it does for the company,
but as folks in the Education/Training/Knowledge business, we all know that not everyone
possesses the knowledge they need to do a good job (Thankfully, that is job security). It is our
job to train/teach/educate them, and the only way to do that is to speak their language
(Business/Finance), not ours (skills, needs analysis, etc).

It is not enough to do good work, have impact, and solve problems. We have to do work that
makes Business sense, be aligned with the strategy and have measurable impact on the success
of the Business, and solve Business problems. No one at the corporate executive level really
cares about training problems, or even the training business (as noted by numerous layoffs and
outsourcing and budget cuts)... they care about THE Business and our value is measured by
what we can as a part of their world, not ours.

Who needs the most 'education' about this? Them or Us? (the best answer, as usual, is "it
depends")
Jesse Finn – jfinn@taleo.com
Taleo

Many factors to consider:

• Depends upon the "maturity" of your business - are you in start up or restart mode, are
you still growing your infrastructures to a certain extent, or do you have a large,
productive, well-oiled machine in place.
• Depends on a) how you are viewed as a business (remember my presentation from
spring, 2004 re cost center, cost recovery, P&L?).
• Depends upon the "level" of measurement of the business unit, i.e. local department,
regional department, theater department, global roll-up.
• Depends on how fully loaded the P&L is, i.e. above the line only, below the line but
without corporate taxes, or totally and completely loaded with a portion of all corporate
costs loaded.
• Depends on the "times" associated with your software sales -- good times or bad. If good,
you can charge better market rates and stick to your guns on discounting; if bad, your
software reps will want services pricing to be lower to help them get the sale and
therefore your margins will go down.

The argument that "training the customers leads to better software sales and therefore we
shouldn't worry about training margin" always plays into this type of discussion. But from the
CFO's point of view, that's already been calculated into the "risk" decision to have a training
business internally versus externally. So you really have to determine the answers to the five
bullet points above and then determine what is a "reasonable" margin for your situation.

Dan Klein
[Dan.Klein@businessobjects.com]
Business Objects

A recent survey of customers showed that trained customers bought 4x more software than
untrained customers. It's important to give execs constant reminders of our strategic
importance to the core business. We develop one new meaningful statistic each yr,
and introduce it during budget season to reinforce our value beyond direct
educ profits. Over time here, we've compile lots of ammo; trained customers buy more
software; are much more successful in achieving their expected business benefits; use more
product features; have higher sat and loyalty. These objective value descriptors have been
extremely useful in succinctly describing our contribution to company success and have
spared us from the std emotional debates.