What’s Changing the Professional Services Industry in 2014?

You need to know about a new acronym that’s smack dab in the middle of it all
by Jeanne Urich, Service Performance Insight

Get ready for some SMAC! No, it’s not some new designer drug. It’s a new acronym for the technology trends dominating the services landscape in 2014:

  • S: Social media
  • M: Mobility
  • A: Analytics and big data
  • C: Cloud

Mar PSJSMAC and its underlying technologies have caused a seismic shift in technology buying. It moves power and control to consumers and business executives and away from the IT domination of the past. New buying centers mean big business for nimble service providers.

It also means traditional IT product and feature selling has been eclipsed by social media-fueled buying behaviors and perceptions. These new technologies usher in a wave of consumer and line of business buying power, making both the sale and delivery of consulting services more complex.

How SMAC is changing professional services

End users and line of business buyers lack the sophistication of IT buyers, as they tend to be highly influenced by market perception, referrals and references. They want straight talk around business benefits as opposed to technical mumbo jumbo. They need demonstrable proof that the solution will actually be used and provide an immediate, positive business impact.

No more multi-year projects, no more extensive customization. These new buyers want proven out-of-the-box functionality, effortless integration with legacy applications and an easy-to-use, intuitive user interface with robust, graphical reporting. Applications must — with minimal modification — work on any device with a focus on mobility.

Social media’s impact

The focus on social has a much greater impact than massive IPOs and market caps for Google, Facebook and Twitter. Buyers expect applications to be socially aware, with Facebook-like functionality for crowdsourcing, instant messaging and telling a friend. Built-in connection and integration with the major social channels is mandatory. This means service providers must expand the social media knowledge and skills of their consulting workforce to ensure new applications provide social connections.

User adoption is of paramount importance. What user group wants a new application if no one else uses it or contributes to it? This means service providers can no longer sell, install and run. They need to provide training and incentives for users to quickly adopt and embrace new applications. Projects must now include early adopters in pilots with a greater emphasis on effective rollout campaigns designed to secure the hearts, minds and loyalty of new user groups. Another trend is gamification, which compels applications to create scores and offer prizes to get and keep users engaged.

Social has made a major impact on buyer behavior and knowledge. Buyers have a wealth of information available at their fingertips, empowering them to research and select services providers based on clarity of messaging and proven reputation. Referrals remain important, but prospective buyers can easily circumvent the vendor’s sales and marketing teams to find out whether past clients are satisfied.

Clear, compelling services provider websites must provide all the needed information for prospective buyers to research and compare capabilities and competencies. The days of in-person, local or regional selling and service aren’t dead. Rather, they’re under increasing siege from global competitors that offer a greater breadth of capabilities at competitive rates based on lower labor costs.

The move away from legacy apps to mobile

Because mobile technologies have eclipsed the use of applications, providing access to apps from a variety of mobile devices is no longer a “nice to have,” but a “gotta have.” This means consultants need knowledge and experience with all major iOS and Android devices while keeping up with emerging standards.

It also means the amount of real estate for user apps and the number of clicks must be minimal. This trend is a major force in streamlining overweight legacy applications with a premium on ease of use and compelling graphics. Mobile skills are in short supply. To recruit and retain mobile experts, services providers must invest in training and knowledge transfer.

Making sense of analytics and big data

Much has been said and written about big data, especially as a means for legacy enterprise application providers to remain relevant. The answer lies not only in access to massive, virtual storage, but also in developing a workforce that can understand and use statistics to power business decisions. Analytic engines and technology often surpass the analytic skills and competencies of business users who have to make sense of it all.

Nonetheless, whenever there’s smoke, there’s fire. The critical shortage of analytic skills represents a significant opportunity for service providers, whose consultants combine technical knowledge with vertical industry acumen, to create the reports and data access corporations need. Stay tuned for an ongoing database and analytics war as SAP uses Hana to wean its users from Oracle.

The cloud overtakes legacy applications

Last, but not least. The cloud has created a whole new oligarchy of monster application providers such as Salesforce, NetSuite and Workday. It seems like these companies have grown overnight in producing multibillion dollar revenue streams by stealing enterprise clients from IBM, SAP and Oracle. Continued advances in software-as-a-service (SaaS), business-process-as-a-service (BPaaS) and infrastructure-as-a-service (IaaS) have created a shift towards configurable, cloud-based delivery models where services are enacted directly within technology platforms.

These standardized platform-based services will gradually replace traditional labor-intensive transactional models and expensive, waterfall projects. Legacy application service providers have been slow to react and jump on the cloud bandwagon. However, cloud applications will increasingly dominate and overtake enterprise legacy applications because they offer accelerated time-to-value and superior return on investment.

The transformation of businesses

Next-generation service providers will focus on transforming businesses and business processes through technologies like cloud, social media and mobility, and applying analytics across the end-to-end services platform to deliver insights and create new value. Power has shifted away from IT to consumers and business executives, allowing operating executives to reach their clients and employees in new and exciting ways.

Social media has created a new services vision — in which buyers and service providers seamlessly interact by building shared learning communities centered on business process improvement and streamlined business interactions. This empowers end users to select, buy and implement self-service applications, thus transforming their interactions with their clients. Increasingly, organizations are demanding access to management and reporting capabilities for their outsourced business processes through mobile devices — anytime, anywhere. Because of this, smartphones and tablets make up the new primary mode of application access.

Never has the promise of technology as a powerful force for business transformation been so close to reality. But the real power lies within service providers that can apply this tsunami of technology to solve real-world business problems. Expect the services industry to grow in 2014, exceeding overall IT spending growth as it has for the past 10 years. However, look for winning services organizations to be those that focus on specific vertical industry business problems yet are savvy enough to build horizontal skills in social, mobile, analytics and cloud. They’ll apply technology and industry knowledge to streamline and transform the way the world does business.

An opportunity for independent services providers

The good news for independent services providers is that the venture capital community and Wall Street are forcing technology companies to outsource professional services to independent service providers. As a result, multibillion dollar service provider channels have been created overnight. Witness more than 1,400 Salesforce.com service providers and a vibrant developer community based on the Force.com platform.

All the major enterprise cloud software companies, such as Workday, SuccessFactors (SAP), NetSuite and Oracle, lead with partner-centric service strategies. During a recent earnings call, Workday co-CEO Aneel Bhusri said, “I do think that what we need is to find local service partners, much like we have — we’ve got the big companies like Accenture and Deloitte and IBM working with us on a global basis. So we also have companies like a DayNine, Collaborative and OmniPoint that are more, I would guess, home boutiques. We need to find those same boutiques in Europe and in Asia. And that’s pretty much what we are doing.”

2014 is the year of SMAC, powered by independent service providers that harness social, mobile, analytics and the cloud to deliver real-world business value.

SaaS Professional Services Come of Age

SaaS Professional Services finally finds its footing
by David Hofferberth and Jeanne Urich, SPI Research

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The year 2010 will go down in history as the one that Software-as-a-Service (SaaS) professional service organizations (PSOs) trumped enterprise software PSOs. One of the most significant changes in 2010 has been the dramatic shift of embedded SaaS PSOs from cost centers to profit centers.

Based on changes in accounting policies for multi-element contracts, SaaS software providers were forced to unbundle PS revenue from license subscription revenue. This significant change resulted in most SaaS PS organizations transitioning to become profit centers.

Remarkably, the 19 SaaS PS organizations that participated in SPI Research’s 2011 benchmark survey delivered the highest net profit of all PS sub-verticals at 23.1 percent, compared to eight other industry segments (software, hardware and networking, IT consulting, management consulting, accounting, marketing and advertising, architects and engineers, and other PS) with an average net profit of a measly 6.4 percent.

According to Software Equity Group’s Q3 2010 Software Industry Equity Report, “By the close of the third quarter, the annual median trailing 12 month revenue growth rate of public SaaS companies had plummeted to 13 percent from 23 percent a year earlier and 46.5 percent two years earlier.”

Two of the fastest growing SaaS firms, Salesforce.com and Citrix, both grew past the billion-dollar mark. Based on their now considerable size, it is unlikely they will continue to post their early-stage meteoric growth rates. As the SaaS market matures, SaaS providers are making trade-offs between torrid revenue growth and profitability.

The significance of a maturing SaaS market means these firms are starting to focus on running PS more efficiently and profitably. As SPI Research predicted, the shift to running PS as a profit center within SaaS organizations is well under way. It is only a matter of time before all SaaS PS organizations shift to a profit focus.

Turnabout is fair play

In the 2010 benchmark, independent firms significantly outperformed captive (embedded) service organizations, but embedded service organizations came roaring back in the 2011 benchmark! A big change this year is that the best-performing embedded PSO is Workday, a fast-growing SaaS provider of human resource management solutions.

In the past, the best-performing embedded PSOs were always within enterprise software companies, not within SaaS companies that, up until now, had positioned PS as merely a channel to rapidly implement clients so they could secure lucrative multi-year subscription revenue.

The cloud flies high

One of the most interesting trends is the service sector movement towards deploying cloud-based solutions. Both large and small PSOs demonstrate a strong preference for SaaS-based solutions with 39 percent of the organizations expressing a preference for SaaS as compared to 29 percent preferring on-premise applications. The remaining 32 percent had no preference.

For firms planning to move their applications to the cloud, SPI Research found the average timeframe for the planned move was less than two years. This trend is gaining momentum, and SaaS will become the primary method of PS application consumption within five years.

SaaS PSOs take advantage of remote service delivery

One of the primary reasons for the surge in SaaS PS profitability is the fact that these organizations are able to deliver the majority of their projects remotely. This means they can take advantage of lower-cost home-based and offshore resources. Additionally, remote service delivery allows these organizations to achieve much higher billable utilization without the burden of non-billable travel. SaaS consultants and project managers alike are adept at multitasking which means they can handle multiple clients per day.

The trend towards more off-site work has been facilitated by cloud solutions, lower cost offshore and near-shore consultants, client and service provider desire to reduce travel and facility costs, and by the power and ease of use of remote service delivery tools.

SaaS PSOs have a unique advantage in delivering the majority of their services remotely:

  • SaaS PSOs billed the least hours on-site (23 percent) while hardware PSOs billed the most (56 percent).
  • SaaS PSOs reported the highest number of billable hours per consultant (1,399) while hardware PSOs reported the least (1,251).
  • Hardware PSOs spent the most hours per consultant in administration and non-billable project hours (616) while SaaS PSOs spent the least (458).
  • SaaS project managers were able to concurrently manage the most projects (6.8) while management consultancies managed the least (2.7).

Where’s Waldo?

A comparison of workforce location provides insight into the future world of work in the PS industry. SaaS PSOs are a harbinger of the new world of IT services. Although most have headquarters in North America, 30 percent of their PS workforce is located offshore. Most SaaS companies co-locate offshore PS and engineering staff to take advantage of lower cost and the availability of technical skills. The following chart shows hardware PS providers take the least advantage of home-based and offshore consultants (only 13.8 percent of their workforce) while SaaS PS providers take the best advantage of home-based and offshore consultants (45.3 percent).

For SaaS companies, the ability to co-locate PS, engineering and support groups provides unique advantages in assuring new client requirements and customizations are incorporated and supported within a single multi-tenant architecture.  For SaaS companies, co-location of PS, engineering and support improves collaboration and career advancement opportunities.

The dark side of SaaS PS

Unless Saas providers find a better way to capture client requirements and model business process change, the downside of SaaS PSO dependence on remote service delivery shows up in the lowest percentage of on-time project delivery, at 68.2 percent, along with the highest frequency of project overruns in our survey at 23.8 percent. This is significantly higher than the project overruns shown in management consultancies where only 7.3 percent of their projects experience overruns.

Despite the hype, SaaS projects take almost as long (4.6 months with three consultants), compared to enterprise software projects (five months with four consultants) and because SaaS providers generally charge higher bill rates, their projects cost more ($184K on average) compared to enterprise software projects ($154K). SPI Research also found PSOs within SaaS companies reported the highest percentage of billable work that had to be written off in the survey (5.4 percent), while those within hardware and networking companies reported the lowest (1.6 percent).

SaaS providers still have a way to go

Given the “youthfulness” of the SaaS market, as these organizations mature, particularly in estimating, project management, quality and on-boarding,  this improvement should positively impact revenue and profits in the near future. For instance, SPI Research found that because the market is still relatively new, the sales cycle for SaaS providers is significantly higher (110 days) than the survey average (98 days).

Fortunately, many SaaS providers have learned from years of experience in other software markets and have constructed their organizations to succeed in the long run. For instance, SaaS providers showed the highest percentage use of a standardized delivery methodology at 67.5 percent, when compared to the survey average of 57.7 percent. They also demand higher sales productivity, with service sales reps averaging slightly under $1.5 million per year in service quota.

And finally, because the market is relatively new, SaaS providers are expanding their new client base at a much higher rate (50 percent compared to the survey average of 37 percent) than their competition in other markets. This expansion will enable them to continue to grow faster than most of the firms in the survey, who primarily rely on add-on sales to existing clients.

Expect the young Saas to last

Software as a service is no longer a fad. As every industry has begun to rein in runaway technology deployment costs, SaaS appears to be the magic bullet. This movement does not assure all SaaS providers of long-term success because eventually their markets will become commoditized and growth will slow.  But in the near future, they represent one of the hottest sectors of the PS market and are proving SaaS clients are willing to pay high rates for rapid deployment.

SPI Research believes this market has just moved into the hyper-growth phase. If SaaS PS providers can efficiently deliver high-quality services, there is no reason this market will go anywhere but up.

Professional Services Business Applications

Survey reveals growing interest in business solutions
by Jeanne Urich and Dave Hofferberth, SPI Research

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Business application adoption by all sizes and types of billable service organizations has steadily gained momentum since professional services (PS) industry-specific business applications came to market over a decade ago. While every billable service organization uses some type of system (albeit manual spreadsheets) to capture costs, bill for time and account for revenue, many do not take advantage of the available business solutions that could help them improve operational performance.

In May 2010, 244 billable professional service organizations (PSOs) representing a variety of PS disciplines and organization sizes responded to SPI Research’s business application survey. Respondents include PS business executives and CEOs of independent firms.

The report provides PS executives and software application providers insight into the level of market adoption, integration and satisfaction with core PS business applications. The report also examines which PS industry sectors and applications are moving to the cloud and how soon.

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Market adoption is improving

SPI Research found varied levels of application adoption, with ERP or “Financials” most prevalent, CRM second and remote service delivery third. Reported market adoption of PSA, HCM and BI was lower than anticipated.

Professional service software providers break down their applications into a variety of core product modules that emphasize the management of costs, clients and resources. The three most commonly used applications include:

∆        Financial management (ERP) is the primary application required to accurately collect, bill and report financial transactions. Traditional ERP providers dominate the PS financial application segment. Intuit’s QuickBooks is the overall leading platform, particularly for PSOs with fewer than 100 employees. Microsoft, Sage, Deltek and NetSuite are the primary ERP providers for mid-size organizations, and Oracle and SAP are the dominant ERP suppliers for large organizations.

Although Oracle and SAP supply core financial functionality, their PS clients are increasingly using dedicated cloud-based CRM and PSA applications. These traditional vendors should take note of the erosion of their service industry client base toward easier-to-use, cheaper-to-deploy, PS-specific business applications. As the PS business gains stature and prominence within traditional technology manufacturing companies, PS executives are likely to defect toward more PS-specific, cloud-based applications.

∆        Client relationship management (CRM) supports the management of client relationships and is designed to improve sales and marketing effectiveness. In terms of PS adoption, surprisingly, commercial CRM adoption at 86 percent is rapidly closing in on ERP adoption (94 percent). This surge in service industry CRM adoption underscores the increased emphasis service organizations are placing on service selling and marketing.

Approximately 14 percent of respondents reported the use of “none or homegrown,” and 22 percent use “other” CRM applications, which means 64 percent use a CRM solution from an industry-recognized software provider. Salesforce.com is the most dominant application provider in the study with 34 percent market share. No other vendor in any category comes close to this commanding market share.

∆        Professional service automation (PSA) solutions provide the systems basis for initiation, planning, execution, close and control of projects and resource management. Unexpectedly, 44 percent of respondents reported using “none or homegrown” as their PSA solution; an additional 21 percent reported “other” while only 35 percent use a solution from an industry-recognized software provider. This lack of PSA penetration represents significant market opportunity for both ERP and PSA-specific providers.

NetSuite, having acquired OpenAir and QuickArrow, is the PSA market-share leader with over 16 percent of the market.

Other applications gaining momentum in the PS sector are outlined below. While not as commonly used as the three mentioned previously, more sophisticated PS operations are starting to deploy HCM, BI and remote service delivery tools.

∆        Remote service delivery and collaboration tools allow staff to conduct Web-based meetings and collaborate from anywhere. According to the survey, 81 percent of respondents use remote service delivery and Web-based conferencing solutions, which demonstrates a high rate of user adoption. The survey indicates the use of these tools has rapidly become the “ante to play” for service providers, and the tools will soon be as ubiquitous and necessary as office and email productivity tools. Webex and Citrix are the market-share leaders in remote service delivery and collaboration tools.

∆        Human capital management (HCM) covers payroll, time and labor tracking, tax and benefits. Most ERP applications provide some level of human resource management, but a new breed of human capital management applications is coming to the fore to offer recruiting, skill tracking and training, performance, career and compensation management from recruitment through termination.

Only 30 percent of respondents use dedicated HCM solutions from either their ERP provider or from specialized HCM providers, which signifies extremely low HCM service sector penetration. ADP, a traditional payroll outsourcing firm, garnered top market-share honors in the HCM category. SPI Research predicts HCM adoption will rapidly improve as new cloud-based tools become an essential ingredient for turbo-charging the people-based service business.

∆        Business intelligence (BI) is the integration, management, use, analysis and reporting of business information to improve decision-making. BI service industry penetration has continued to grow and now stands at 43 percent. Primary providers are the market-share leader SAP, having acquired Business Objects, closely followed by IBM, Microsoft, Oracle and Informatica.

PS industry moves to cloud solutions

One of the most interesting trends is the service sector movement toward cloud-based solutions. Both large and small organizations demonstrate a strong preference for software-as-a-service (SaaS) solutions with 46 percent of the organizations expressing a preference for SaaS, as compared to 25 percent that prefer on-premise applications.

For firms planning to move their applications to the cloud, most plan to do so within three years, which means the SaaS sector will continue its double-digit revenue and market-share growth.

SaaS considerations

The roots of SaaS actually go back to timesharing in the 1980s. When re-envisioned a decade ago as a means of providing “browser-based” or “thin-client” application access, it would have been hard to predict the sweeping changes cloud-based computing would make on both the software industry and application users.

This study shows the service industry overwhelmingly endorses SaaS, and many firms are transitioning to it. Cloud-adoption has been greatest for PSA, closely followed by CRM, HCM and BI. ERP is the only application segment where the majority of organizations have and plan to maintain an on-premise solution.

The promise of SaaS

So what’s behind the service industry stampede to cloud-based applications? Several factors make SaaS a perfect fit for the service industry, but one the most important considerations is that service providers are increasingly operating virtual organizations.

The days of hiring by geography and dispatching hordes of consultants to work for months or years on a client site are gone. Project team size and duration continue to decline, and engagements are becoming smaller and more iterative, making flexible staffing and virtual deployment a necessity.

A growing phenomenon has been less work performed on the client site, not only to minimize travel and facility costs, but also because virtual projects are proving to be more successful and take advantage of the best available resources, regardless of location. Cloud computing is clearly the best solution for virtual organizations and reflects and supports their Internet-intensive work style.

The second important consideration is that most service organizations do not have numerous or, in many cases any, IT staff. This makes the prospect of running a large on-premise data center with a robust IT staff and support for loads of customizations an investment many service executives abhor. In most service executive’s minds, headcount represents revenue, not a cost, so the idea of turning responsibility for application development and maintenance over to a cloud-based vendor makes a lot of sense.

Cloud computing offers the big advantage of requiring limited to no IT staff, and installations typically take weeks instead of the months or years required by on-premise solutions. Cloud computing allows service executives to do what they do best — solve complex business problems for clients, without having to worry about a lot of IT staff.

Another straw tipping the balance toward SaaS is the applications themselves. The leading service industry SaaS providers have done a superb job of focusing on the business processes essential to the service industry. As SaaS applications have matured, the vendors have focused great attention on ease-of-use, powerful business process workflow tools and the ability to easily modify screens, forms and reports to reflect unique business requirements.

All of this adds up to service-specific applications, which reflect and represent best practices. Since services are people-based businesses, service executives are more than willing to change business processes if they see a better way to run the business. Most service-specific cloud solutions offer excellent out-of-the-box support for core business processes like quote-to-cash, prospect-to-project, time and expense capture, and billing and project accounting.

Lastly, beyond all the hype, the economics of SaaS are compelling. SaaS applications outshine on-premise applications in terms of upfront cost, deployment time and total cost of ownership.

Just like outsourcing, the allure of lower cost was the initial reason organizations started to shift to SaaS, but the reason they stay with SaaS is because it gives them greater control over their business with less hassle at a predictable cost. SaaS may not be right for the largest and most complex service organizations, but it is a solution worth considering for the majority of PSOs.

The allure of business solutions 

The PS sector has developed quite an appetite for business solutions in the past decade. From the smallest PSOs to the largest, the sector continues to increase its use of information as a competitive, productivity tool to increase performance.

The market is changing, with new solution providers and different deployment options available, making it much easier and more cost-effective to implement business applications.