What is the right operating model for an embedded professional services organization? What are the right financial measures and targets for services inside of a tech company? Such Professional Services questions are among the top business challenges that TSIA helps our members with in the Professional Services research practice. Why? Well, they reflect a set of built-in, hardwired problems affecting more or less every tech company. Tech companies are not services companies, per se, and so there’s bound to be thrashing over the services parts of their businesses. And if you’re actually able to get aligned around a concept, then conditions, key stakeholders, or prevailing theories can easily change and you’re back to square one.
Every time a big tech company makes a bold statement about how it is re-thinking or re-stating its services business, it causes a stir to some extent. Invariably, these changes are made to create the impression that recurring revenues and/or subscription revenues are increasing.
But we’ve all seen this movie countless times. Would anyone be truly surprised if, in a year or so, some of these same companies quietly reversed course?
Transforming Professional Services Business Model: Professional Services Alignment
When you delve into individual companies’ statements, oftentimes their actions and messaging suggest they themselves might not be fully strategically aligned. One company recently stated its goal to create a world class consulting capability even as it was announcing that it will no longer report services revenue to investors.
But how are you supposed to create a world class consulting capability when some or all of it functions essentially as a cost center? Maybe such companies are aware of some success plays that we haven’t learned yet. I doubt it.
But there’s another perspective on this. The idea that the consulting/professional service business inside of a tech company should create most or a lot of its value from the indirect benefits it can drive (like product growth or customer time to value) is about as earth-shattering as the sun coming up tomorrow.
Below is an aggregated stakeholder segment view from well over 300 individual stakeholder responses we've collected from our pre-workshop Professional Services Strategic Alignment survey since we launched it in our advisory engagements about two years ago.
Every stakeholder group rates “adoption/customer value” as the most important charter objective for Professional Services. Outside of the core Professional Services stakeholders, PS revenue growth is third or fourth priority. Even the core Professional Services group rates revenue growth second.
So it’s not whether the Professional Services business should primarily exist to drive things like customer growth, land sales, customer value, etc. There’s more or less universal agreement on that. The much harder questions are:
- What’s the RIGHT business model and operating model to enable that?
- Should it be able to cover its basic operating costs, contribute some margin, cover an allocation, fund your own innovation?
- How big should it be?
- How fast should it grow?
- What investments are required?
- What skills do we need and how do we source them?
This is where we’re seeing most of the … let’s call it … experimentation. However, we know from years of benchmark data and advisory work that there’s a financial model strike zone within which the vast majority of Professional Services organizations tend to land regardless of charter, level of maturity, etc. We deduce from this that there are some basic laws of physics and economics in play.
The Risks Involved
Said differently, there are real risks associated with trying to do unnatural things to solve for the problem that Wall Street doesn’t like services or transactional engagement.
To name just a few:
- How do you present a value message for services when they are heavily discounted or given away?
- How can you fund the required investments to make services a customer success engine when the services are heavily discounted or given away?
- How can you attract and retain the most talented service professionals who generally do not want to work for a function that is considered a cost of doing business.
We’ve seen these risks become issues time and time again. Is it possible to take the position that so many big tech companies seem drawn to take regarding services and do it successfully over the long haul? We shall see. But it's a familiar movie. My bucket of popcorn is at the ready.