Project-driven services have become both mandatory and a core differentiator in the marketplace

By David Hofferberth, Managing Director Service Performance Insight, LLC

projects

Introduction

SPI Research has seen a strong trend toward making virtually all work, project-based work.  Companies in every industry have turned their focus toward projects.  A project focus makes sense as organizations plan work with a beginning, an end, and all the steps in between.  The key element of projects is that there are costs and time associated with every phase or task, and there should also be value delivered.  Every dollar spent on an initiative should be tracked to determine whether it was worth the investment.

Projects are easier to qualify and quantify and executives like that

A project-based business environment makes perfect sense to executives. Projects begin neat and orderly, with specific start and stop dates, projected costs and expected value. Leading organizations have also incorporated a structured delivery methodology into their project-based work in order to track everything related to it more closely. This environment helps companies better project a return-on-investment (ROI), which in today’s economy has become essential.

But very few projects go exactly according to plan, as unforeseen circumstances, or changes by the customer impact the project or service to be delivered.  Those organizations that have taken a project-based approach to work can more easily change the scope of what is to be delivered, as well as its cost and expected change in duration. Again, this gives executives greater control over the work being delivered, ensuring the project provides value to both the organization delivering it and its customer.

Better tools are now available for customer and client facing organizations

Project management solutions have been around for a long time. They were initially developed and used in large scale internal projects such as IT, construction, or new programs. With the advent of the Professional Services Automation (PSA) market, project management gained in popularity for client facing, billable organizations.  PSA is best known as a resource management and time and expense management solution, where the goal is to deliver projects at sufficient margin on-time and on-budget and to keep worker time and costs under control.

Typically, PSA solutions did not have the robust project management capabilities of a solution like Microsoft Project, and eventually, many PSA and project management solutions morphed into a supercharged project management solution, called project portfolio management (PPM).  PPM includes additional capabilities that provide visibility to a portfolio of projects including their time and cost commitments and especially their strategic value to the organization so they can be prioritized.  These solutions give organizations greater project visibility and greater project structure through the use of standardized (or structured) delivery methodologies.  Therefore, many PSA solutions are integrated with Microsoft Project when projects become more complex.

Perhaps the most important aspect of these tools is that they provide demonstrable return on investment to the organizations using them. In 20 years of researching the market for tools that improve operational efficiency and effectiveness, solutions in the project management space have more than paid for themselves.  PSA’s benefits have been demonstrated for some time, especially in larger project-based organizations.  SPI Research found that larger organizations increased billable utilization from 71% to over 75% with PSA, meaning roughly 80 additional billable hours annually per consultant.  Even more important, PSA helped increase profitability per consultant by over 200%, from$7,575 to $24,018!

This benefit does not include many others such as increased customer satisfaction as projects are completed more frequently on-time and on-budget, more satisfied employees, as they better understand what is required of them and the value they must deliver, and greater financial governance, tracking all costs associated with project delivery and comparing them to the revenue generated.

Now, new Project Service Automation (PSA) solutions are coming to market specifically designed to help client-facing organizations in all industries focus on completing project-based work.  The functionality of Project Service Automation, does not differ significantly from Professional Services Automation but is built on top of Customer/Client Relationship Management (CRM) solutions to optimize the activities of client-facing organizations such as sales and project/service delivery.

Conclusions

While the global economy is not where most would like it to be, it has “heated up” enough that voluntary employee attrition is on the rise, which negatively impacts profit because it is more expensive to recruit, hire and train employees.  This operating environment calls for greater structure, enabling individuals and teams to better work together, utilizing consistent methodologies in the project-related work they conduct.

This is especially true in the manufacturing sector, where companies have become more dependent on services as a key differentiator.  These product-centric organizations now rely on services as a profit center because manufacturing has become commoditized so customers look for better support to improve the value of their purchase.  It is also very relevant in other industries, such as accounting, Architecture, Engineering and Construction, Advertising and more, as the need to deliver high quality services on-time and on-budget become even more critical in a very competitive global environment.

Taking a project-based approach to work provides executives, employees, customers and clients with greater visibility into work conducted, its cost, revenue, and ultimately value delivered. In an age where more executives demand to see quantifiable value in the work they pay for, companies that take a project-based approach to work have a leg up on the competition.

This just in, “Everything-as-a-Service”

By David Hofferberth, Managing Director Service Performance Insight, LLC

blue-cloud-services
The global economy has been on a wild ride over the past couple years. Uncertainty in all regions, heightened by Britain’s Brexit vote and elections in the United States (the world’s largest economy), show the next few years will be anything but normal. It is during these times of economic uncertainty that organizations in every market must focus on operating at peak levels of efficiency while providing high-quality products and services their customers demand.  Most companies have moved different aspects of their business to the cloud, as it offers greater collaboration, visibility and efficiency, along with lower operational costs.

The cloud was just the beginning

One of the major benefits of cloud-based computing is that everything has become a service. There is software-as-a-service (SaaS), platform-as-a-service (PaaS), infrastructure-as-a-service (IaaS), and others. The fact is, everything has become a service, and organizations have been able to take advantage of this new operational paradigm, not only to save money, but also to drive greater efficiency and better collaboration around the world.  Independent software vendors (ISVs) can develop and run one solution ensuring every organization has the latest version and access from anywhere, anytime.

Everything-as-a-Service (EaaS) enables people and devices to better communicate and therefore keep better informed in terms of changes and challenges in the market. The Internet of things (IoT) is for real. The goal is to provide greater visibility and flexibility, as well as communicating situational change in real-time, so that prescriptive action can be taken.  This paradigm shift impacts everything, from a refrigerator that communicates to the service provider that there are problems with the condenser, to a professional services executive who finds out a major project is about to go over-budget.

Companies in every market look to consolidate their application infrastructure

Years ago most companies built large, costly information technology departments.  It was really their only choice in order to leverage information for competitive advantage. Over the past decade many of these organizations have worked to consolidate the number of applications they use, preferring to run their operations on a single platform.  Obviously, choices narrow as organizations work on “one throat to choke”, meaning the SaaS provider manages the complete customer experience, from deployment through implementation, support and any potential upgrades.  And the benefits are obvious – single platform solutions offer greater integration, which ultimately lowers cost, improves visibility across the organization, and makes employees more productive. Having all of this run in the cloud further lowers cost and provides a safer, more secure infrastructure for an increasingly virtual workforce.   Utilizing a “one-stop-service” provider also includes customer support (self-serve and assisted), field service (break-fix with proactive IoT), project service (for multi-day engagements) and other services, which further reduce time, cost and hassle to the organization.

Conclusions – Let your solution provider partner take care of your technical issues

The movement to an Everything-as-a-Service economy will enable companies to better focus on the products and services they work to develop, deliver and support. The technology infrastructure, and the partner providing it, are critical in any company’s efforts to improve their competitive position.  The need to increase efficiency as well as innovation, communication and collaboration will only succeed through the introduction of information technology, focused on the services sector.

Blurring the Lines Between Products and Services

Business is changing. Everywhere you see product-driven organizations counteracting product commoditization through the addition of value-added services. Services-driven organizations are packaging their services into repeatable service offers and products to shorten time to value. The line of demarcation between products and services has become very blurry. Is software-as-a-service software or a service? Is Google selling software or a service? What about Linkedin and the host of e-commerce and social media applications are they products or services?
products and servicesOne thing is clear. Across all industries, firms are placing a premium on the total customer experience — lifetime value — not just the worth of the product sale. Aftermarket services are the cash cow of the automotive industry where product margins are thin, and competition is intense. This trend is good for customers because it means the days of selling and running are over.

Today, it’s about customer value creation. This means consumers expect usable products that actually help them do a job. They don’t want shelf-ware. This trend has also emerged in the professional services sector, as increased global competition has made it necessary for services-driven organizations to offer service packages and products, with tangible deliverables.

For the past five years, we at Service Performance Insight have tracked the percentage of total revenue generated by products in independent professional services organizations. Until recently, independent service providers reported about 5 percent of total revenue came from the sale of pass-through hardware and software. In the 2014 Professional Services Maturity™ Benchmark, this figure nearly tripled to 12 percent, and this is just for independents, such as IT and management consultancies. Figure 1 shows the percentage of service provider revenue coming from products.

Figure 1. Percentage of Revenue from Products in Independent Services Organizations
Percentage of revenue from productsNot all of the revenue comes from proprietary packaged services, as many independent professional services providers also sell additional off-the-shelf hardware and software. However, an increasingly higher percentage of revenue comes from their own internally developed products such as dashboards, report packages, data loaders and integration tools.

Is this an anomaly? We doubt it. Just like product-driven organizations have moved to services as a source of differentiation, now services-driven organizations are doing the same.

The good news: Products help differentiate services
Given the commoditization of many types of professional services, a packaged solution including products can help professional services organizations distinguish themselves from the competition. When hiring a service provider, customers look for demonstrable outcomes. The product could be hardware and software combined with services to create a unique solution. These solutions offer a proven complement of hardware, software and services that together solve a complex business problem.

This is especially evident in the IT consulting sector, as systems integrators are increasingly developing their own proprietary software to better help their clients use the technologies they implement. As the market moves towards greater industry specialization — with unique business processes, data and analytics — this trend will become increasingly popular.

The bad news: Both Products and Services are complex
Many products, while providing a competitive advantage, are very complex to develop and manage over time. It brings a whole new host of factors into play as services-driven organizations begin to develop and sell products. Complex products require additional infrastructure for long-term development and support, something many professional services organizations are not accustomed to providing.

In the past, it was all about implementing a product with a defined, albeit time and materials, statement of work, without any long-term support or ongoing commitment. Now there are upgrades, staged roll-outs and re-implementations of the product in addition to managed services and hosting. This new scenario keeps the service provider engaged with the customer for the life of the solution, demanding long-term contracts and relationships.

Profit margin of products versus services
Products and services generate very different profit margins. For instance, traditional software vendors sell software with a 90 percent margin, whereas their consulting services might only produce a 10 to 20 percent margin as shown in Table 1.
Table 1. Services Provider Percent of Revenue and Margin from Products and Services

Service Provider Revenues and MarginsObviously, executives prefer 90 percent product margins as opposed to 20 percent for services. Unfortunately, as products become more complex, the services component also becomes more complex and mandatory. Product executives must carefully consider the desired profit margin of services without degrading overall corporate profitability all while maintaining high levels of customer adoption and satisfaction.

An approach to consider
Products must be developed with specific services in mind and include the potential for additional service and support revenue over time. Executives need to agree on the specific goal of the product, as it might be a sales enabler for more services, and thus carry a minimal cost or margin. Or it could be intended to generate high levels of product profit with minimal service margin.

We have worked with organizations on both sides of this spectrum. The biggest issue is confusion regarding the realistic amount of services required to bring the product to life. Immature products or products that solve complex business problems may require loads of services. The question is: Can the required services be sold at a profit, or must they be discounted to garner the product sale?

When the goal of the product is to generate profit
In general, most technology products deliver high profit margins. However, as products become more complex, so do services. Failure to implement the correct services strategy could ultimately doom the success of the high-margin product if customer use and adoption are low due to poor implementation and training.

When the goal of the product is to generate additional services sales
Develop a services strategy that incorporates service importance at the time of sale. Most products require additional training. If this service is offered for free, then executives must closely monitor it, as it can eat into both product and service margins.
Conversely, services firms that have already begun to develop products need to watch their cost and the perceived value they deliver. Many firms that have had initial success developing a product get caught up in the “develop a product at all costs” mindset. Unfortunately, improperly managed products tend to eventually cost more than the value they deliver. Do not lose focus on the intended goal of the product.

Questions to consider
Before working on the development of a product to enhance overall revenue, all parties involved need to answer key questions and accept the answers.
1. What is the intended goal of the new product?
2. What are the projected margins for products and services?
3. Will the combination deliver the desired overall profit margins?
4. Is the services workforce required to sell, given the technical nature of the product?
5. What is the upgrade strategy, and how often will upgrades be delivered?

All firms care about bottom-line profitability. Whether it comes from products or services may not be the primary consideration. In many cases, products are more predictable than services, but without required services and enhancements, product revenue could quickly dry up.

What does it take to succeed in selling both products and services?
If men are from Mars and women are from Venus, then products are from Pluto and services are from Saturn. The development and sale of both is very complicated. Companies with strong skills in manufacturing products cannot easily begin selling services. And of course, the opposite is true.

A team must be developed with specific skill sets and a collaborative framework to ensure the synchronicity between products and services. The IT infrastructure is especially important, particularly the enterprise resource planning (ERP) solution, which should be able to manage both products and services in the same sales order.

As the economy strengthens, one thing has become abundantly clear: Product manufacturers are investing heavily in professional services, and services organizations are investing heavily in building products. Both of these are unfamiliar territories to the executives running their respective organizations. Managed correctly, both offer the potential for greater growth, client satisfaction and profit.  A complementary product and service strategy requires leaders on both sides of the aisle to learn from each other and collaborate to develop real solutions which solve real client problems.