What the Heck is TES?

Many people have heard of technology-enabled services, but the term has never been trendy or popular like “SaaS,” “cloud computing,” or “micro-blogging.”   My partners and I assembled the term in 2003 when we were struggling to describe our investment strategy to investors in the first Emergence Capital Partners fund.   We are glad that since then we have seen it on other venture capital websites, because we think it is really important.  We use the term so much that we usually abbreviate it with “TES.”   So what the heck is it?

Technology-enabled services are information service offerings that technology companies develop and operate on behalf of their customers.

The technology industry is dominated by companies, including IBM, HP, Microsoft, Oracle and many others, who sell their technology to customers in the form of products, such as computers, networks, software, etc.  Corporate customers use those products to automate and operate information systems that are unique to each company.

We now see that TES is changing the way companies are buying technology.  Increasingly, customers are seeing the advantages of subscribing to services that process their information rather than own and operate the systems themselves.  Salesforce.com, a SaaS and cloud pioneer, shows why the value proposition is so compelling:  should you own, operate and maintain an expensive and ever-changing data center to manage your salesforce automation system, or should you let the world leader manage it for you for a fraction of the cost.  Salesforce.com operates their own technology, upgrades the hardware and software when it is needed, maintains world-class security and reliability and does it at a scale no single customer can match.  Other customer benefits include immediate implementations and dramatic reductions in overcapacity.

Leading TES companies, such as Google, Salesforce.com and OpenTable, have demonstrated some of the other unique advantages of TES.  By operating your customers’ information systems, you can develop insights in their usage and the value your customers are generating.  These insights improve your marketing, product development and customer support.  In some cases, those insights can be sold to create addition value.  Strong TES companies have solid predictable revenue, strong growth, healthy margins and steady cash flow.

When defined this way, TES as an umbrella term that includes SaaS, Cloud Computing, Business Services, Consumer Internet Applications and Information Services.  Each of these categories have business models that are slightly different, but they all use the TES approach.  I suspect that TES hasn’t gotten the same recognition as SaaS or cloud computing, because most companies identify themselves with a more granular category.

It is important to differentiate TES from people-enabled services or a infrastructure-enabled service.  People-enabled services use human beings to serve customers.  Examples include professional services, consulting, customer support and most industries that have seen significant offshoring. People-enabled services can be very capital efficient, but the scalability is limited by the ability to hire, train and manage people.  Doubling and tripling is extremely difficult without major pains.  Infrastructure-enabled services involve massive investment in technology infrastructure which subsequently can be served to customers a low marginal cost.  Examples include CLECs, data centers and cable companies.  People-enabled and infrastructure-enabled services are both legitimate business models, but they can not scale as easily or with the capital efficiency of TES.

We have found the TES framework useful as we evaluate early-stage investments.  I hope that now, if you happen to hear someone say “TES,” ­you’ll know what the heck it is!