Today’s professional services industry faces the unique challenge of needing to transition from a solely product-driven business model to one that also provides services and customer outcomes. Recent industry surveys have shown that software is replacing hardware, cloud is replacing on-premise, and services are becoming more valuable than products, and any organization that fails to stay current with these emerging trends can find themselves struggling to stay afloat.
In this webinar, we covered the current industry trends driving this need for change, and how TSIA’s PS Benchmarking reports can show you how to accelerate your understanding of strengths and weaknesses, and provide you with the tools to move your business from a Level 2 supplier to a thriving Level 3 or Level 4 organization.
What’s happening in IT?
The biggest challenge to overcome is revenue growth, which is at a zero percent average industry-wide. But what is causing this significant slow in revenue? It’s actually due to a number of related factors:
- Software is replacing hardware.
- Cloud is replacing on-premise.
- Services are becoming more valuable than products.
- Business buyers are eating into the IT budget.
- More businesses are focusing on selling outcomes directly to executives.
Transitioning to becoming an outcome-based services organization brings the price-per-unit and complexity down for customers, but it unfortunately puts a lot of pressure on traditional product-based business models in technology. Hardware companies, who can rely on obtaining as much as 75 percent of their revenue from selling high-margin hardware, have been hit especially hard by this latest trend.
Some businesses have the right idea of offering more product-attach professional services to supplement hardware sales, but even those have started to wane. Where a lot of businesses get stuck is in failing to continually expand their services portfolio, offering only the same offerings year after. It’s crucial to constantly explore new ways to innovate the PS business model by expanding your services portfolio—a priority in order to retain customer interest with fresh offerings.
What Do the New Business Models Look Like?
In our latest book, B4B, we discuss in-depth about how we’re moving from a world that sold complex products to IT departments, to where we get paid when the customer gets some kind of outcome, whether it’s cost savings or improved employee productivity. Our current goal should be transitioning our business models and our capabilities to move from being Level 1 and Level 2 suppliers to becoming Level 3 and Level 4 suppliers.
In the PS industry you have five ways you can make money, and it takes a combination of these to expand your business and keep customer interest:
- Product – The customer pays for a technology asset.
- Subscription – The customer pays for access to technology (XaaS).
- Annuity Services – A service capability that is renewed on an annual or multiyear basis (e.g., traditional support and maintenance, premium packages).
- Project Services – A business is paid to deliver a product.
- Transactions – A business is paid per activity (e.g., per click, per customer, per invoice).
Historically, manufacturers had a “Make, Sell, Ship” mantra, which falls into the category of a Level 1 and Level 2 supplier model. This model is anchored primarily on having great features within the technology produced. The sole responsibility of the supplier was to ensure that the technology was working, but customers were ultimately responsible for their own ROI.
Average professional services remain heavily product-focused, which means that when moving to a Level 3 or Level 4 business model, we’re not only responsible for the technology, but also for the customer’s ROI.
What Does That Mean for Professional Services?
Given this change, it might seem as if there are only two options: defend and protect your legacy PS business, with the most margin and least amount of risk; or sacrifice the known, in order to focus your energy to adapt and transform your business to build new initiatives around expanding your list of service offerings.
While it might seem like an “or,” it really needs to be more of an “and.” Not many successful businesses elect to rest on their laurels and only optimize their old business, hoping for the best. To be a successful PS business in this changing market, there needs to be a balance between maintaining legacy revenues while simultaneously expanding toward offering more new services, but the shift will not be easy, and might even seem intimidating without first knowing what to expect.
Rapid Change and Startling Continuity
PS has what we call the “fish problem,” which refers to the shape the graph takes as revenue comes out of the legacy models and the time it takes for your new technology and professional services to get up and running, creating a transition in your capabilities.The hardest transition is in the middle of the fish, when there’s more pressure on your legacy revenues while you’re trying to invest and create new capabilities. It can be understandably intimidating, but your ultimate goal is to rapidly accelerate through this transition while keeping the fish as skinny as possible as you head toward the light at the end of the tunnel.
By transitioning to Level 3 and Level 4 status, you’ll simultaneously have to become a better Level 2 supplier, but this can only be a positive change for your business. By shifting priorities to pave the way for new technologies and services, the business you have will develop more consistent processes, resource management, and better growth and utilization. By the time you get toward the tail end of the fish, the hard part will be behind you, and you can go forward with a more balanced approach to a modernized PS business model.
Listen to this Industry Pulse – Professional Services webinar to learn more about how TSIA’s benchmark reporting services for professional services can help you reach the tail end of the fish and become a better Level 2 supplier while making the transition to Level 3 and Level 4.
Bo Di Muccio is vice president of professional services research for TSIA. He is also the chairperson of the TSIA Professional Services Advisory Board. Previously he served as the senior director of research and advisory services for TPSA.Keep the conversation going with Bo. He may be reached at email@example.com.