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.

6 Lessons Learned for Packaging Service Offerings

Ensure that your organization sees success in service productization
by Carey Bettencourt, Service Performance Insight

TimetoLearnOver the last year, my team at Service Performance Insight (SPI) has worked with dozens of companies and trained hundreds of professionals to implement sustainable service productization, or packaging, programs.

Lesson 1: “No market, no money, no mission.”

First and foremost, many services should not be packaged.

Service packaging investment requires an overall business plan and a business case that outline the target market, competition and your differentiation. Service packages must be services that can be successfully sold and delivered for tens, if not hundreds, of clients. If the problem is not urgent, not pervasive and clients are not willing to pay to solve it — don’t package it!

You must have a compelling answer to the question “Why should we package this service?” Too often firms begin packaging services to correct internal problems. Instead, focus should be on the market and the
pervasive business problem the service solves.

Companies would never dream of developing a product without an understanding of the market. So the same standard must be applied to services.

Lesson 2: “Walk before you run.”

Product management has come into its own as a specific function and discipline to ensure that products are developed with the client in mind and based on sound market and competitive analysis. That said, service productization must attain the same level of focus and specialization to be successful. A key finding is that service productization relies on and requires sound fundamentals to be in place in product management, marketing and solution selling — all disciplines which typically sit outside the professional services organization and its core service delivery competency.

At the same time, the PSO must have attained at least Level 3 (Project Excellence) PS Maturity in the Service Execution Pillar with fully deployed systems and processes for service delivery methodology development and enforcement. Professional services automation and knowledge management systems must exist to provide the service productizing team with insight into project artifacts and best practices. Further, the PSA solution is required to measure compliance and productivity improvements.

Lesson 3: “Implement a structured service packaging method.”

Based on our research and consulting experience, more than 80 percent of initial service productization attempts fail to achieve hoped-for objectives. Key root causes include ad hoc approach, lack of executive commitment, no dedicated roles, and no program vision or clarity.

To improve the success rate and shorten the time to value of service product development, my team developed the SLM3 framework, as shown in Figure 1, a methodology and tool kit that enables the service product team to implement a holistic and sustaining service productization program.

Implementing this framework compels the service product team to pursue a disciplined approach to establish the following:

  • Articulated and well-understood services strategy.
  • Service productization program vision.
  • Active executive sponsorship.
  • Market-driven focus.
  • Global company adoption of program.
  • Dedicated resource commitment.
  • Cross-functional participation.
  • Common sales and delivery methods, tools and templates.

Figure 1: SLM3 Framework

SLM3

Source: Service Performance Insight, 2013

The contents of SLM3 include:

  1. Critical success factors. The required conditions for service productization success.
  2. Organizational structure. The teams, hierarchy, roles and responsibilities leading and supporting the program.
  3. Program foundation. The critical service productization program capabilities and activities — project management, change management and portfolio management — that are required for startup and ongoing program operations.
  4. Service productization methodology. The five-phase lifecycle process that compels the team to develop a strategically aligned, market-driven and high-quality service product focus.

Lesson 4: “Incorporate change management.”

Based on my team’s years of service packaging experience and research, I believe that organizations should approach service packaging as a transformational change to the traditional way companies currently sell and deliver services. Service packaging requires cross-functional disciplines to work together to define a consistent approach to selling and delivering in-demand services.

I suggest organizations think of service packaging as a new and better way to develop solution value capture, which requires behavioral changes. In order to gain organizational buy-in and support, it is important to launch the program with clear communication, incorporating answers to the following questions:

  • Why are we doing this?
  • Why are we doing this now?
  • How will we work together?
  • How will this impact me?
  • What do I need to do to be prepared?

Effectively communicating the program’s important purpose and stakeholder’s role will not only create a positive perception, but it will also accelerate service packaging program support and participation.

Lesson 5: “Name that team!”

Successful service packaging requires a long-term view with dedicated, empowered and experienced team members; executive and cross-functional support; and consistent long-term funding.

Committing the required resources and placing the right people in the right roles is a critical success factor for this programIn fact, inadequate resource commitment will lead to frustration with the service packaging effort and results. And not assigning and aligning qualified people to program roles will lead to individual and team anxiety and, most likely, lack of productivity.

Expectations that service packaging will provide a quick fix for effective solution selling or service delivery consistency are false, but the effort is worth it if organizations go into it with eyes wide open.

The only way to guarantee success is to follow a service lifecycle management methodology that clearly outlines the program charter and governance structure for decision-making and funding. Clearly defined and empowered teams should be assigned. Appropriate measurements, metrics and compensation are needed to cement the program into ongoing operations and measure progress.

Lesson 6: “The proof is in the numbers.”                                                             

Following the development of the Service Lifecycle Management Maturity Model, my team scored 102 survey participants in the 2012 benchmark. The most mature firms follow a disciplined, methodical, market-driven approach to packaging services and deliver excellent financial results.

As presented in Table 1, the revenue and profit key performance indicators for the most mature firms show material differences between the lowest two levels of maturity and those that are at Level 5. The numbers in the colored boxes represent the percentage of companies that are at each maturity level.

Table 1: Service Lifecycle Management Maturity Model Metrics by Maturity Level

slm3numbers

This table should remove all doubt about the efficacy of service lifecycle management, as the most mature are able to achieve superlative net margins while exceeding their annual revenue and margin targets.

The value of productization

Productizing services is difficult. But more than likely it is necessary in an era of greater service complexity, global competition, economic indecision and a more enlightened client base. Properly managed, investments in service productization can pay off handsomely — with significant improvement in margin, revenue per person and ability to manage larger projects.

I hope that sharing these lessons learned helps your organization better prepare to launch — or improve — your service packaging programs.

Donner Party or Gold Rush? Part 2

Where to start in service productization
by Jeanne Urich, Dave Hofferberth and Carey Bettencourt, SPI Research

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In the first of a two-part series, we covered the movement to productize services and its similarity to the Donner party and gold rush, based on the early results of our 2012 service packaging benchmark study available in September 2012. Here we discuss where to start because taking the first steps in the right direction is critical to establishing a successful service productization program.

It makes sense to build service products in the same way that companies develop, sell and manage manufactured products throughout their life cycle. Unfortunately, many organizations have initiated service productization efforts with limited market data or very poor information. Your organization must start with the client’s pain and answer the following questions to assess the opportunity and validate the market for your proposed service product.

  • Will this service product eliminate a significant problem or pain for my clients?
  • How urgently do my clients want to resolve the problem?
  • Where are our products and our proposed service product in the life cycle of the market (growth, mature, decline)?
  • Do we provide unique, differentiable capabilities to resolve the problem?

In many cases, great ideas have no immediate market. Therefore, the creation of service products makes little sense and moves the organization away from serving more pressing client needs.

Because of this, a professional services organization (PSO) should look at the types of work it currently provides and evaluate its importance to the client base. While no two clients are the same, many of their pains are sluggish sales, reduced profits, no coherent strategy, organizational inefficiency, poor quality, regulatory scrutiny and many others mandating the need for your organization’s expertise.

Establish executive sponsorship

Many of the organizations that we’ve surveyed and interviewed have started establishing service productization initiatives. Some initiatives launched in the service delivery arm of the organization, while sales or marketing established others. The need for service productizing made sense to these organizations, and many invested a large amount of time and effort in its development.

Unfortunately, most of these same organizations failed to gain active executive sponsorship within professional services and other key departments. This executive support is a critical success factor, as it drives resource development commitment and participation, sales promotion, and delivery adoption of the service product.

Senior executives who understand the benefits and the process required to initiate service productization are in a stronger position to sell and implement the program across the entire organization. Without this support and leadership, it doesn’t matter how well-structured; the service packages are. Those will never receive critical acceptance from the entire organization and will fail.

Involve all relevant parties

Following the establishment of a senior leader to oversee the service packaging effort, PSOs must build a team with representation from the various departments within the organization that can affect the service’s success. These departments include marketing, sales, service delivery, partner management, human resources, finance and accounting, legal, procurement, and potentially others.

While every department might not have the same level of involvement and responsibility, each should be consulted to ensure service products are well constructed, have the necessary assets (people, material and equipment), financial backing and value; and will be delivered with the highest levels of quality. Creating service packages heightens the understanding and awareness of the importance of services by others, unlike one-off services. Hence, every individual on the team must have a seat at the table to make sure the service product is conceived and implemented well.

Clarity helps drive the optimal outcome

Once the professional services organization has the right people on the team, it’s critical that the team has a clearly defined process for the development and implementation of service products. We have developed and implemented a service life cycle management methodology in many organizations. Your organization may have its own method and processes. Regardless, the processes involved must provide clarity in service product development and help the organization understand the role and responsibilities in the service productization process and contribution to its ultimate success.

The leader of the team should have a documented process complete with steps required to build service products and specific evaluation criteria for every step. The clarity of this process provides every department with an analytical framework to evaluate and determine whether the service productization process should continue. It’s critical the process have several evaluation checkpoints to make go or no-go decisions. These ensure that the service product has quality built-in and is positioned for financial success.

How to increase your organization’s success rate with service productization

Service productization isn’t a new concept. For the past decade, many service organizations have considered it and many have successfully implemented it. However, going from idea to implementation takes a significant dedication and resources to achieve success. Our research has shown it will become an increasingly important component of your organization, as technologies, regulations, globalization and services become more complex.

Service packaging begins after identifying a client’s pain, attaining executive sponsorship and establishing the service packaging team. Many others within your organization will become active participants during the process. The potential for success depends on the buy-in coming from across the organization.

“Thar’s gold in them thar hills!” But there are also many traps that could ultimately doom your organization as it moves toward service packaging. Let your organization’s efforts lead to riches, not ruin! As with prospecting for gold, luck and timing come into play. However, preparation, organization and leadership will improve your organization’s chances for success.

 

Donner Party or Gold Rush? Part 1

An analysis of the service packaging equation
by Dave Hofferberth, Jeanne Urich and Carey Bettencourt, SPI Research

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In this first of a two-part series, we cover the results from our 2012 Service Packaging Benchmark. This article examines both sides of the service packaging equation: root causes of high failure rates and ingredients for success.

For us, two big events permeate Northern California history — the unlucky Donner party of 1846 and the lucky discovery of gold at Sutter’s Mill in 1848.

The Donner party consisted of 87 American pioneers from Illinois and Missouri who set out in a wagon train headed west for California, only to end up trapped by snow in the Sierra Nevada mountains. The subsequent casualties resulting from starvation, exposure, disease and trauma were extremely high, with many of the survivors resorting to cannibalism.

The California Gold Rush and its gold seekers, often called “49ers,” flocked to California from all corners of the globe, swelling the population of San Francisco from less than 200 in 1846 to more than 36,000 by 1852. Thanks in large part to the promise of riches, “gold fever” forever changed the political and economic landscape of California — leading it to become the state it is today, with the eighth-largest economy ($1.9 trillion) and 38 million inhabitants.

So what does California history have to do with service productization? Based on 100 responses to our 2012 Service Packaging Benchmark, the enthusiasm for and the allure of developing high-value service packages feels like the beginning of a gold rush, yet the apparent success rate looks more like the Donner party mortality rate of 50 percent.

So why were thousands able to navigate the perilous seas, high mountains and fierce Indian tribes to strike it rich panning for gold while only 46 of the 87 Donner party made it to the promised land? The answer lies in better planning, following a previously charted course, and a large measure of luck and timing. The same success factors apply to the relatively few services firms that successfully package, sell and deliver a comprehensive service portfolio.

Pressures leading to service packaging

According to the survey results, as Table 1 shows, the pressures leading to the stampede to service packaging primarily revolve around improving sales effectiveness and accelerating client time to value. Fewer firms see service packaging as an effective antidote to rapidly commoditizing markets or pressures to move to the cloud. The prevailing view according to the benchmark is service packaging provides more sales and client benefit than service delivery advantage. However, well-researched and well-developed service packages can improve service delivery quality and provide a solid framework to quickly ramp new hires.

Table 1: Primary challenges driving the need to package services

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Source: Service Performance Insight, August 2012

High cost of failure

The Donner party’s demise was the result of a series of bad decisions made based on not having a guide, no prior experience, a lack of understanding of the perils of the journey and poor advice. A charlatan by the name of Lansford Hastings enticed them to follow an unproven course with the promise of “short-cutting” 350 miles from their journey to California. In fact, heading across the deserts of Utah and Nevada and attempting to scale the mighty Sierra Nevada mountain range in winter not only added 150 miles to the journey, but also led to unwarranted tragedy and suffering.

Our Service Packaging Benchmark and consulting experience depict the same poor results and needless suffering from the scores of firms that pursue service packaging without a clear road map and understanding of service life-cycle management. Inexperience, coupled with a lack of executive sponsorship, resource investment and empowerment, leads to lackluster results and outright failure more often than not.

A key finding from the benchmark is that a clear role, function and charter for service packaging do not exist in many organizations. 60 percent of the survey respondents say their organization do not have a clearly defined service packaging strategy or focus. Only 34 percent report the service packaging investment and resource plan is approved and funded.

Fifty-three percent recount the person(s) responsible for service packaging does not have a clear mandate or clearly defined management reporting structure. Another 38 percent of service packaging leaders answer to the service line of business executive. The remainder report to marketing or sales.

Eighteen percent of the personnel assigned to develop service packages have no prior experience, while only 5 percent of the teams are described as high performing and visionary. Seventy-seven percent have no dedicated service packaging team; they rely on borrowed resources, while only 16 percent have invested in permanent roles. A mere 6 percent believe their service packaging function is high-impact and strategic.

A whopping 74 percent report their organizations don’t have an incentive or compensation plan in place to promote packaged services. Yet average spending on service packaging accounts for almost 2 percent of total revenue a number that’s higher than average spending on training or information applications.

Something is clearly wrong with this picture! With the low level of executive sponsorship, funding, team dedication and empowerment, it is no wonder only 39 percent of all services are sold and delivered with standard methods and tools.

Table 2: Signs of Failure

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Source: Service Performance Insight, August 2012

Impact of service productization done right

The excitement regarding services packaging is significant. Other than our annual Professional Services Maturity Benchmark, we haven’t seen any topic garner more attention and interest in six years. Table 3 from the 2012 survey highlights some of the expected benefits services organizations hope to attain as they increase their emphasis on productizing services.

Table 3: Expected Benefits of Service Productization

0812 table 3

Source: Service Performance Insight, August 2012

Bottom line: Most executives are interested in productized services as a driver of incremental sales. This perceived benefit is understandable, as professional services organizations can grow much faster if they are able to reduce the sales cycle and make it easier to position and sell services.

However, increased sales and shortened sales cycles are only part of the promise of service productization. As services are productized, the entire organization can get behind efforts to improve quality and profitability, much the same way new products are launched, sold and enhanced.

In Part 2, we’ll examine what it takes for professional services organizations to successfully initiate and sustain service productization efforts. As you will see, an organizational focus on service packaging coupled with strong leadership and adequate funding is just one of the necessary ingredients required to successfully navigate the mighty service packaging desert to reach the promised land of riches that can result from increased service sales and profit.

 

The Next Generation of Professional Services: Service Productization – Part 2

The what, why and how of productizing services

by Dave Hofferberth, Jeanne Urich and Carey Bettencourt, SPI Research

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In the first of this two-part series, we explored the services productization trend. In Part 2, we share our new Service Lifecycle Management Maturity Model™ (SLM3™) to help professional services organizations (PSOs) to start reaping the benefits of service productization. 

The service industry is buzzing about a new way to create, sell and deliver repeatable service products. It’s called “service productization.” Productized services present the allure of bigger sales pipelines, rapid deal closure, faster client time-to-value and improved project delivery quality. Based on our research, no other recent business topic has generated the same level of curiosity and confusion.

Introducing SPI’s Service Lifecycle Management Maturity Model™ (SLM3™)

0612 2We’ve learned that no single process instantly creates high-quality service packages. Many service product development teams don’t follow a service product development roadmap or approach service productization with the same level of discipline as product managers do. To fill this void, we’ve developed a five-phase, closed-loop Service Lifecycle Management Maturity Model™ to help manage the service productization process. See Figure 1 for the model.

We find that service productization is more successful when an organization uses a framework to choreograph roles and responsibilities and define clear outcomes by phase. This approach leverages knowledge and existing project artifacts. Speed and quality of service productization improve with experience. Each step outlines key decision points and deliverables that break the service productization effort into measurable and actionable components.

The five phases of service productization are:

  1. Innovate. Identify service product candidates, conduct research, analyze the market and fund the effort.
  2. Define. Plan the overall effort; define requirements and content; design service productization methods, tools and processes. Take an inventory of current assets to productize.
  3. Develop. Build service products based on best practices, consistent methodology, tools and templates. Test assumptions.
  4. Launch. Conduct beta test; assemble sales, marketing and delivery materials; train sales and service professionals; execute sales and marketing campaigns; and deliver with quality.
  5. Optimize. Develop measurements and rewards; collect feedback from sales, PSO and clients; identify areas for improvement. Propose significant changes and add-on services back through the Innovate phase.

Table 1 lists the deliverables and benefits of each phase of the Service Lifecycle Management Maturity Model™.

Table 1: SPI’s Service Lifecycle Management Maturity Model™ — Deliverables and Benefits

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Source: Service Performance Insight, June 2012

SPI’s Service Lifecycle Management Maturity Model™ success measures

To be successful, align your organization to ensure that each relevant function understands its role and obligations. When service organizations get serious about service productization, the initiative becomes the catalyst for an overall transformation. Effective service productization leads to a better way of doing business for the entire organization.

Service productization creates a business model centered on delivering maximum client value in the least amount of time. The process can be supported by a system including financial and project management, knowledge management and collaboration tools. Refer to Table 2 for each team’s roles and measurements.

Table 2: Service Product Teams and Measurements

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Source: Service Performance Insight, June 2012

Example of Service Lifecycle Management

Figure 2 represents a five-phase service solution delivery method. The chart illustrates how a company has productized defined service packages. First, the entire service lifecycle method was established then repeatable components were productized and tested in the field through many client projects.

A good rule of thumb is to start with service productization training. Then package client workshops and assessments. Develop and integrate repeatable workshops and assessments throughout the service delivery lifecycle. This approach facilitates ramping less-experienced PSO resources under the quality assurance guidance of senior PSO resources. These packaged services incorporate all core attributes, including contract templates to execute a legal agreement. A fast start package assumes that only out-of-the-box deliverables can be completed within a shorter timeframe than a typical full solution delivery.

Figure 2: Service Product Example

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Source: Service Performance Insight, June 2012

Common failure points

To reap the benefits of productized services, a PSO should spend plenty of time in the Innovate and Define stages of the process. Too often, service packaging teams jump into service development without developing a business plan or garnering cross-functional support for the initiative. The risks of failure are high without critical support, tools and cross-functional participation.

Without proper planning, executive sponsorship and funding, the risk of lackluster field and client acceptance or complete failure of a service productization initiative is high. The most common pitfalls we have observed include:

  • Inadequate executive sponsorship
  • Insufficient market analysis
  • Underdeveloped business case
  • Lack of competitive differentiation
  • No sales, marketing, training or launch plan
  • Unrealistic scope, time and budget
  • Insufficient resources or inadequate competencies
  • No beta or reference customers
  • No feedback or measurement systems or quality controls
  • No repeatable methods, tools, IP or plan for re-use
  • No understanding and appreciation for required organizational change

Properly executed, a successful productization initiative can deliver improved service performance, harvest knowledge to make it more profitable and improve overall operations all while delivering more client value faster.

Benefits of service productization

Global competition, a more sophisticated client base and a rapidly changing technology environment are increasing the pressure on professional services revenue and margin. A good way to respond to these external forces is by productizing services. Additional benefits include sales differentiation, repeatable quality service delivery, improved financial and operational predictability and greater value to your firm and clients. Predictable quality and results improve your reputation and increase the probability that your firm will be selected for future work.

By productizing services, the PSO can better prioritize the creation, management and improvement of its services portfolio. Marketing can build the appropriate materials to do a better job of defining and advertising the service portfolio. Contracts can be tightened and service level agreements considered. Accounting and finance can better forecast cash flow, revenue and profits. The consulting organization can better plan and schedule the workload to deliver high utilization, high quality and repeatable business.

The Next Generation of Professional Services: Service Productization – Part 1

The what, why and how of productizing services
by Dave Hofferberth and Jeanne Urich, SPI Research

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In this first of a two part series, we explore the services productization trend. In part two, we share our new Service Lifecycle Management Maturity™ Model to help PSOs to start reaping the benefits of service productizing.

The service industry is buzzing about a new way to create, sell and deliver repeatable service products. It’s called “service productization.” Many find productized services alluring because of the promise of bigger sales pipelines, rapid deal closure, faster client time-to-value and improved project delivery quality. Based on our research, no other recent business topic has generated the same level of curiosity – and confusion. Why?

Professional services organizations (PSOs) of all sizes and types want to embark on this new path to greater sales differentiation and improved performance. Yet, few have succeeded. And for many, the reality falls short of expectations.

Historically, product manufacturers have been productizing support and training services for decades. Tiered customer support levels have been the standard since the 1990s. But the “service-in-a-box” concept is only now being widely applied to professional services, often with lackluster results.

Productizing high-value cloud, strategic or management consulting services proves to be more challenging because few client business problems are the same. And, unique consulting knowledge and its application are hard to define and replicate.

Productizing services offers pre-defined scope, pricing, duration, deliverables and results – providing PSOs with predictable outcomes that were previously inconsistent. But why is it done? How is it done? What are its benefits?

Defining service productization

Most professional services organizations already have some type of service packaging initiative. Typically, when PSOs define service packages they limit the scope and therefore the impact of a comprehensive productized service portfolio.

For the purposes of this article, service productization is:

“The process of delineating, building, deploying and improving a clearly defined service lifecycle framework to achieve operational improvements in support of an organization’s strategic objectives.”

A productized service has the following core attributes:

  • Defined service offering with supporting marketing material detailing client value and benefits.
  • Comprehensive sales playbook with supporting sales collateral and materials.
  • Clearly defined and bounded scope, assumptions, delivery process, tasks, roles, staffing requirements, duration, pricing structure and outcomes.
  • Standardized delivery methods and tools.
  • Estimation and service delivery tools that support the initiative.
  • Pre-defined deliverable templates.
  • Embedded quality controls and project governance.
  • Enforced feedback and continuous improvement.

Productized services can be stand-alone, “fast start” offerings or they can be components of an overall service lifecycle portfolio. An organization can offer productized services in one or hundreds of locations. Regardless of its reach, the service must possess the core attributes that make the training, sales and delivery processes clear, consistent and repeatable.

Moreover, a productized service demonstrates that the PSO has a consistent knowledge base and unique intellectual property. This approach shows that the PSO has the skills to deliver the service within a pre-defined time and cost. Without productization, professional services are less tangible and the benefits harder to define.

The service productization trend

As Figure 1 shows, we have identified three major forces driving PSOs toward service productization:

  1. Global competition.
  2. Clients’ increasing procurement sophistication.
  3. A rapidly changing technology environment.

Figure 1: Forces Driving Service Productization

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Source: Service Performance Insight, May 2012

First, globalization and increased competition exert price pressure by commoditizing “cash cow” services like enterprise software implementation. Service providers are responding both offensively and defensively by productizing their most frequently delivered services.

Successful productization not only protects revenue and margins, but also provides the differentiation to increase them. Furthermore, productizing services improves resource management. It provides a framework for new consultants to come up to speed quickly while freeing experienced consultants for more complex, unique client problems.

Second, increased adoption of strategic sourcing and sophisticated procurement practices means that clients demand more value from their suppliers. Specifically, today’s professional services clients require clearly defined service descriptions, delivery process transparency and confirmed project costs before they approve a consulting engagement.

Third, the rapidly changing technology environment introduces increased complexity for PSOs and their clients. Clients have to justify both quantitative business enhancement metrics and promised qualitative improvements. Simultaneously, they must operate with leaner staff levels. Project durations are shorter — despite increased technological complexity — to accelerate business value capture.

Shorter, faster, more iterative projects mean that professional services organizations must engage in more sales cycles and win more projects to achieve targeted revenues and required margins. Successful projects today require PSOs to provide greater project governance with supporting tools to ensure quality while remaining within scope and budget.

Overall, PSOs face tremendous pressure to expedite and streamline their market approach with packaged service offers containing well-defined sales and service delivery guidelines. Done right, productized services create lucrative new revenue and profit streams.

Managed services

More professional services organizations are taking productized services to the next level by providing clients with managed service contracts. Managed service agreements are powerful tools for deepening client relationships while improving customer retention. These contracts can create a reliable, recurring revenue stream for the firm and improve its competitive position.

In the IT consulting sector, a firm can augment its project-based business with support agreements for hosting, software support, regular maintenance work and upgrades with technology refresh options.

At the heart of the managed service agreement, is a contract specifying service terms, service level agreements, billing schedules and any service inclusions or exclusions.

Work associated with delivery of managed service contracts incurs costs, and requires infrastructure, resource scheduling, management of escalations and delivery. Monitoring these variables to stay within the terms of the agreement ensures accurate and timely billing and collection. This careful monitoring also provides a clear understanding of the cost structure, risk exposure and profit potential.

By developing standardized managed service offerings, the PSO develops a unique market competency and annuity revenues. It generates long-term benefits by selling these repeatable services to multiple clients.

To achieve the many benefits of managed services, a PSO depends on its internal systems. Without these systems in place, managed services cannot be performed effectively. The reason PSOs implement an integrated business management system is to handle the entire operation from sales and project management to service delivery, accounting and billing.

Why productize?

PSOs consider service productization as they face increased global competition, strategic sourcing adoption and technological complexity. Embedded PSOs face constant pressure to reduce the cost and complexity of implementation as the parent product organization sees professional services primarily as a means for rapidly installing products to secure product revenue. Independent PSOs view service productization as a means of branding, protecting valuable intellectual property and highlighting their differentiation.

Service productization provides these benefits:

  • Increased proposal to sales conversion ratios.
  • Improved accuracy of estimates.
  • More measurable and consistent service delivery performance from repeatable services.
  • Accelerated recruiting, hiring and ramping.
  • Ability to staff with less experienced resources.
  • Improved intellectual property value around methods, tools, and processes.
  • Superior project governance.
  • Predictable costs, resources, time and deliverables.
  • Reduced risk and improved consistency and quality.
  • Enhanced forecasting accuracy.
  • Faster revenue recognition conforming to accounting standards.

Figure 2 shows benefits of using a standard service delivery methodology. The data comes from our analysis of 235 independent PSOs with 10 to 700 employees.

Figure 2: Benefits of Using a Standard Service Delivery Methodology

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Source: Service Performance Insight, May 2012

Firms adopting a well-coordinated service productizing initiative gain a clearer understanding of how their skills and business processes support their service business strategy. By necessity, the process of service productization clarifies the firm’s objectives and exposes existing competencies and skill gaps.

Service productization forces the firm to identify best reusable methods, tools, templates and practices. This change helps propel consistent service execution while protecting reputation and quality. As PSOs expand internationally, service productization provides a valuable method to standardize country and regional processes for similar projects.

In Part 2, we will introduce the Service Lifecycle Management Maturity Model™ framework that helps organizations productize their portfolio. 

At Their Service

Standardize and package your services for client assurance and repeatability
by David Hofferberth and Jeanne Urich, SPI Research

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Despite the downturn, the professional services market continues to hold its own. Service buyers are looking for greater consistency, predictability and accountability from professional services organizations (PSOs). Rather than open-ended, time- and expense-priced projects, the market has moved toward deliverables-based and fixed-price engagements, shifting more of the risk and responsibility for success to the service provider.

Delivering productized — or packaged — services allows PSOs to better meet these new expectations. Using standard methodologies results in dramatically improved revenues, solid pipelines and increases in revenue per employee and billable hours. But the move to productized services presents a number of challenges, including the need to package complex service offerings around what remains an intangible commodity: people skills.

Without the right level of governance, offering guarantees that projects will be completed on time and within budget can leave PSOs exposed to unacceptably high risks, and cause them to foot the bill for project overruns. Therefore, organizations need to create and implement productized services, such as blueprinting and setting up project management offices (PMOs).

What is service productization?

Productized services have a number of essential characteristics:

  • Pre-defined and clear offering.
  • Consistent service delivery methodology.
  • Supporting tools and templates.
  • Consistent knowledge and skills to deliver them.
  • Quantifiable costs that provide demonstrable client value.

While clients may have different requirements, most services can be productized because the underlying components that make up the services are very similar.

Service productization takes its lead from the manufacturing sector, where many products have become increasingly complex and require a level of professional services expertise for their deployment. Services are also part of an increasingly important service and support feedback loop designed to improve product quality and functionality.

Productized services allow companies to deliver consistent service at a lower cost and higher quality; they also help with the training of service personnel as there are guidelines and templates for new recruits to follow.

By definition, productized services include clear delivery guidelines or blueprints that PSOs can refine and reuse from one project to the next.

The meter is on …

The challenge for PSOs is to deliver quality, consistency and repeatability when pricing is based on the hard-to-predict billable hours of consultants. When service engagements are time and materials priced, the odds are stacked in favor of the PSO; if consultants work extra hours, the client just has to pay more. There is little incentive for the service provider to reduce the time and cost of a project − and in many cases, clients have little insight into the true cost of the services.

However, clients are becoming more sophisticated buyers and are demanding greater accountability from their service providers. They’re starting to mandate fixed-time, fixed-fee and shared-risk engagements. In fact, these types of projects represent about half of all work performed according to Service Performance Insight’s 2011 benchmark report.

The client/supplier dynamic changes when the project has a fixed price and timeframe. People don’t operate as consistently as machinery, and no one delivers service in exactly the same way twice. Therefore, PSOs need to focus on developing “blueprints” with structured business processes and quality control procedures, so consultants have a roadmap or instruction manual to use as a guideline.

The project management office

PMOs are dedicated groups within organizations that create service delivery methodologies and maintain quality standards for project delivery. These departments support productized service offerings as they aim to standardize and implement project management policies designed to improve project governance and consistency.

The Project Management Institute (PMI) defines five levels of project management maturity — ranging from reactive, to repeatable, to proactive, to measured and innovative to optimized. According to SPI’s research, effective project management offices can have a significant impact on project quality, client satisfaction and margins.

Based on our benchmarking research across more than 600 organizations, we define best-in-class PSOs by a number of factors, including:

  • Achieving client satisfaction ratings of either “satisfied” or “very satisfied.”
  • Project completion on or before the planned completion date.
  • Project margins in the top 40 percent of margin results for the sample.
  • Project revenue at or above the planned level.

What it takes to productize services

PSOs looking to deliver productized services need to break services down into the fundamental building blocks of work items, tasks and process steps that make up the service delivery lifecycle. They can then repackage those blocks into repeatable service offerings that appeal to their client base.

Service productization requires consistent methodologies and implementation criteria. It requires structured deliverables with pre-defined scope, methods, skills, time and cost. But if that sounds too onerous, bear in mind productized services also help PSOs to scale more effectively as they expand by geography, industry and in the number of services they offer.

Benefits for service providers

Customers love the predictability and repeatability of a productized service. After all, no one likes getting in a taxi and being told the meter is running when they don’t know where they’re going.

For sales and marketing teams, productized services make services more tangible.  Packaged services are easier to estimate, propose, price and sell because pricing and scoping parameters are based on clear assumptions and previous experience.

PSOs have more predictable employee costs and skills, and consultants can get up-to-speed in less time, resulting in better productivity. From a finance and operations perspective, service packaging improves forecasting accuracy and revenue recognition based on previous engagement costs and pre-defined service duration.

PSOs are already adopting some of the elements of productization. Based on SPI Research’s 2011 PS Maturity Benchmark survey of 214 PSOs, 48 percent already use a standardized service methodology and are experiencing significant benefits from it.

For example, PSOs that use a standard methodology on over 60 percent of their projects have experienced nearly four times the revenue growth compared to those with fewer than 60 percent standardization, with year-over-year revenue growth of 11 percent compared to 3 percent. They also have 13 percent higher revenue per billable employee, and 13 percent higher billable utilization.

Ultimately, though, the focus is on improving client satisfaction, which leads to referrals and repeat business. Customers like to buy products because they know what a product can do — They can see it, test it and compare it. Likewise, clients value predictable, tested and proven services that provide demonstrable, reference-able value.