By Jeanne Urich, Managing Director, Service Performance Insight, LLC
How to optimize today’s PSO to drive revenues
2014 appears to be the latest high point in the consistent recovery of the services sector. Both technology spending and the technology professional services industry have led economic resurgence with strong improvements in the demand for services. This has resulted in significant year-over-year revenue and margin growth. Professional service executives are cautiously optimistic as they start focusing on long-term growth strategies.
The Current State of Professional Services
According to early results from the SPI Research 2015 PS Maturity™ Benchmark survey, discretionary spending for information technology and training has gone up. Now that business is improving, services executives have refocused their attention on profitably, growing revenue through geographic, vertical industry and portfolio expansion. The survival tactics of the recession have given way to exploring new growth strategies within the context of global customers, a war for talent and intensified competition.
Changes in the economy and the competitive market are dictating new approaches to the creation of a services portfolio. As traditional products are replaced by more attractive cloud-based solutions, profit margins have been squeezed out of low-level installation, configuration and integration services.
Clients are no longer content with simple product implementations. They now demand greater service provider accountability for results. This change has precipitated new strategies, business processes, change management, managed services and training offerings aimed at equipping client organizations to take full advantage of new solutions. In turn, professional services organizations are adding more strategic service capabilities, while moving away from commoditized staff augmentation and product installation.
Within the hardware and software technology sector, services is now viewed as the new growth engine, with services revenue outstripping product revenue. CEOs have awakened to the opportunity to leverage services as an instrumental growth driver for the business, and as an engine for value creation. They have charged professional services executives to build an integrated, high-performing and global PSO. This article outlines growth strategies that will empower professional services leaders to build and sustain a high-performing services operation.
The growing importance of professional services firms
Services is the fastest growing segment of the global economy. Companies in all other industries are increasingly outsourcing and out-tasking non-core business processes to specialized professional service firms. Table 1 shows 2014 IT service spending is now approaching the pre-recession growth rates of 2008.
Services organizations are hired at all levels of the enterprise because they can perform work better (knowledge), faster (specialized) or cheaper (out-tasking) than internal employees.
The reasons for using a PS provider include:
• Outside industry expert specialist perspective.
• Expertise too expensive to retain as full-time employees or only needed short term.
• Short- and medium-term expertise to complete specialized projects.
The primary assets of any PSO are knowledge, experience, skills and reputation. The key to staying competitive in today’s market is effectively managing and using these assets.
Types of technology professional services providers:
Independent professional services organizations. Pure-play PSOs provide strategic advice, innovation and specialized knowledge to help drive performance improvements for their clients. Clients hire systems integrators to implement or integrate technology based on their strategic competence, specialized industry and product knowledge, cost and references. Management consultants are hired to provide strategic insight, guidance, facilitation and coaching.
Embedded services organizations. ESOs operate much like PSOs; however, they are part of a product-driven organization. The majority of ESOs focus exclusively on their company’s own technology. The largest ones (IBM, HP, Fujitsu, etc.) provide a complete range of hardware, software, networking, managed services and outsourcing services not associated with their company’s products.
For the small to mid-size ESOs, their primary charter is to successfully implement their company’s products. While they may be focused on professional services revenue and profit, they are often asked to perform non-billable presales, proof of concept and customer satisfaction services at little to no charge.
In product-driven organizations, running professional services as a profit center is a fairly new phenomenon. While product vendors have provided services for years, only recently have vendor-supplied professional services become of greater strategic value as a means to more successful client outcomes. Professional services within technology-oriented organizations have become a client success generator, a source of revenue and profit and an innovation platform for growth.
Defining the professional services vision, mission and strategy
To establish their charter and strategy, PSOs must answer three fundamental questions to position their organization for growth.
Why? The services vision defines the desired future state in terms of the fundamental objective and strategic direction. A vision statement outlines what the organization wants to be, or how it wants the world in which it operates to be. It concentrates on the future. It is a source of inspiration. It defines the purpose or broader goal for being in existence and can remain the same for decades if crafted well.
What? The mission defines the fundamental purpose of an organization by succinctly describing why it exists and what it does. A mission statement answers the question: “What do we do?”
For example, “Accenture’s mission is to become one of the world’s leading companies, bringing innovations to improve the way the world works and lives.”
The typical independent technology professional services charter is essentially to “Delight clients and provide meaningful careers for employees, resulting in profitable growth.”
For ESOs, establishing the appropriate charter is trickier, because their primary role is to support the product sale to ensure client success in using their products. There may or may not be a profit motive. Embedded PSO charters include product extension, market share expansion, partner enablement, footprint expansion or harvesting knowledge and ensuring client success and adoption.
How? The strategy translates mission into execution by defining the markets, customers, service portfolio, partners and competitors the organization is targeting. Strategy defines the path to achieve desired objectives.
A PSO’s strategy includes defining the business and operating models. Many organizations are aligned by geographical regions. However, there are a variety of other ways in which the organization can be structured to improve client intimacy and services execution. The business may be structured around skill-based competency centers, lines of business, specific customers or vertical markets.
Independent versus embedded mission and strategy
For independent PSOs, the initial establishment of a mission and strategy is fairly straightforward. The organization focuses on the types of business problems it can address, the types of clients who have those problems and the vertical industry and geography they will operate in.
Executives must assess the market and determine where their strategic value lies. From that point, they can assess market rates and prepare a strategy that optimizes successful client outcomes with commensurate pricing, staffing and selling to maximize the potential of winning business and producing excellent client results.
Setting strategy for an embedded services organization is more complex. In fact, professional services executives within product-driven organizations might not have a say in the company’s overall direction. Traditionally, ESOs have been utilized for implementation and to assure high levels of quality, customer satisfaction, references and repeat product sales. Profit margins were typically an afterthought.
In the new world of embedded professional services, profits are becoming increasingly important, as is the breadth of the service portfolio. Many of these organizations are moving away from lower margin implementation services and toward more strategic services such as business process reengineering, change management, analytical reporting, managed services and outsourcing. These organizations are starting to use lower-cost subcontractors or partners to supply simple implementation and customization services. Software providers typically cap PS revenue at 20 percent or less of total revenue to minimize the dilutive effect of lower margin PS revenue on the overall company income statement.
Defining Technology Services Charters
How much control and responsibility services organizations are willing and able to take for successful client outcomes determines their services portfolio. For example, if the PSO is an adjunct to product development, the charter is to successfully implement the product and provide feedback to engineering. This charter dictates a focus on implementation, customization and testing services. Successfully implementing the product is the goal, and services profit may not be a motive. Table 2 maps typical service charters to required service offers.
Mapping portfolios to client impact
The reality for most complex technologies is that the cost and value of the services required to design, build and run the application far outweigh the cost of the product. The rule of thumb for enterprise software is the initial implementation services will cost three times the product. The aftermarket services for product extension, migration, reporting, analysis and management typically exceed six times the initial cost of the product.
With cloud technologies — because the software is easy to use and easy to install — the service to product ratio is closer to 1:1, meaning the cost of implementation services is about equal to the first year cost of the product. SaaS software providers make their money on multiyear subscription contracts. In SaaS companies, the role of PS is to drive client adoption (and continued use of the product).
In many product-driven enterprises today, services are outstripping product revenue and at much higher margins. This situation bodes well for organizations that learn how to exploit services, as the additional profits can be plowed back into product innovation and sales. It also provides a more consistent, recession-proof revenue stream, which facilitates improved planning and financial control.
As the level of client impact goes up so do the complexity and value of services required to achieve that impact. The services provider’s ability to control and achieve desired client outcomes drives up service value and price.
Figure 1 maps services portfolios to client impact. Lower-level services designed primarily to implement products and drive product revenues are characterized by low to negative margins. Higher-level services produce higher margins because the provider assumes more responsibility for successful client outcomes, thus providing significant business value.
How to ensure professional services success
The role of professional services continues to evolve. Intense competition for clients and skilled resources continues to escalate. Winners are simultaneously becoming more specialized and more global. Successful providers can quickly assess and capitalize on technology shifts while increasing their level of client accountability and control.
To succeed, professional services executives must become more focused and more deliberate in developing and implementing a clear service strategy that can be understood and followed by both clients and employees.
They must then translate their strategy into an operating plan, which takes advantage of new applications to enhance productivity and improve visibility and control. They also need to use all their assets including people, intellectual property, information technology and structured business processes to succeed. Without proper tools, few strategies will succeed over the long term.