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Professional Services

Moving to a Professional Services Subscription Model

Seven Steps to Creating a Professional Services Subscription Offer

4 min read
By David Young

“What are professional services subscriptions?” and “How do we get started designing new offers where the revenue generated will roll up as annual recurring revenue (ARR)?” are the two most common questions TSIA Professional Services Research has responded to over the past three to four months.

Subscription services is the new, appealing model for many professional services organizations. Delivering recurring revenue is considered higher value toward the overall valuation of the company. These new services pivot the focus from product or engagement success to the longer view of customer success. 

Subscription-based products are being fueled by various innovations in cloud computing and mobile connected devices. This is the main reason behind the spiking interest in professional services to move to a subscription model. As more companies take the initial steps to create subscription services offers, it’s become an increasingly popular topic.

The economic turbulence will lead some to slow down a bit, while others will use the opportunity to release new professional services subscription offers. With the intensifying interest, there is a bit of confusion on what exactly professional services subscriptions really are.

This blog will review:

What are Professional Services Subscriptions?

Professional services subscriptions are services that are designed to be renewed, unlike traditional, transactional project-based services. They focus more on customer needs and outcomes rather than product functionality. 
 
Subscription services really need to be thought of as a renewable service that has a recurring revenue model paid for up front. This revenue is then recognized over the course of months or years. Subscription/renewable services routinely have a flexible consumption model leveraging vouchers or credits. 

They typically have contract terms and conditions that include language such as “use it or lose it” within a certain timeframe. “Use it or lose it” refers to expiring currency or service entitlements, which encourages customers to consume services before the end of term.
 
Let's face it: If a subscription service is not renewed, it is essentially a transaction. Thus, renewing the subscription is a new priority for professional services delivery teams. Project managers and customer success managers need to become more focused on long-term success for the customer.

Types of Professional Services Subscriptions 

With input from our members across TSIA practices, the following taxonomy should help set the stage for a common industry definition for subscription services. 

  • Transactional services are the traditional professional services that have a natural life cycle with a defined scope of work and a defined end or completion date. These traditional services are essentially project-based services.
  • Contractual services are engagements that have a termination date but do not have a well-defined scope. They typically don’t have defined deliverables. Contractual services have a termination date and require a renewal event. Put differently, they are “good” until the end of the term. Technical account manager (TAM) engagements or resident engineers are common examples of contractual services.
  • Subscription services are ongoing agreements with no end date or term. Subscription services are “good” until canceled. 
  • Renewable services typically refers to either contractual or subscription services. The main driving force behind renewable services is recognizing the revenue as annual recurring revenue (ARR) as opposed to typical services revenue. 
The 4 Types of Professional Services Subscriptions
The 4 Types of Professional Services Subscriptions

Customer interest in renewable services must be considered. Over the years, we have seen many offers developed that simply do not land with the customer. 

When designing professional services subscription offers, customer interest is foundational, as is having company funding to transform the organization in support of renewable offers.

Before Getting Started…

Recurring services revenue involves many changes across the organization. It requires the organization to come together and approach the overall customer engagement differently with more focus on the customer’s desired outcome instead of the company’s desired outcome.

Continuous value or continuous incremental value is at the heart of the renewable offer(s). Transforming the organization to focus on customer value over the traditional feature function of technology has been underway for years. It’s been a slow journey.  The amount of organizational change needed to pivot the sale, delivery, and operational motions to customer value is routinely underestimated. For many, it can be a pretty heavy lift.

There are warning signs to take into consideration. Rolling out an offer without the operational processes will lead to friction points, delays, or even complete failure of the offer set. Although time is of the essence, you should guard against releasing the new offers too quickly. Cross-functional planning will be the winning play.
 
Moving to a renewable professional services subscription model requires a collaborative approach. Salespeople, customer success managers, and project managers must stack hands on the customer value journey. 

The change involves all customer-facing resources aligning on the overall charter to drive long-term customer success and increase renewal rates.

Making the Move to a Professional Services Subscription Model

We find more companies are taking a component approach when selling new subscription offers. Funding for these components is through flexible currency, such as credits, vouchers, or blocks of hours that are paid for as part of the subscription. 

These components become part of the entitlement for the subscription. The customer can, in many cases, self-serve from the services catalog. The focus of ratable revenue recognition for services may be a new concept for some companies, further complicating flexible consumption and subscription rollout.
 
Operationally, this shift requires new customer consumption analytics. If the model is “use it or lose it,” losing the entitlement due to lack of consumption puts real pressure on the likelihood that the customer will renew. 

Consumption dashboards are also needed to provide information on customers who are maximizing the use of their subscription, making them good candidates for upsell opportunities.
 
Some operational efficiency can be expected by moving to subscription services. The need for deal reviews and “statement of work” reviews can be notably reduced or eliminated. Flexible consumption models (such as credits or vouchers) involve a single procurement process with the customer and gives them the flexibility to apply them as desired.

This approach streamlines the procurement process, leading to a reduced timeline in achieving the desired outcomes.

Seven Steps to Creating a Professional Services Subscription

There are seven basic steps to getting started on creating your offer: 
  1. Assemble a cross-functional team consisting of core stakeholders. 
  2. Conduct a broad survey among your customers to determine their interest and desires in professional services subscription offers. 
  3. Assess your existing professional services portfolio for low-hanging fruit. For example, resident engineering offers or TAM offers could be relatively easy to pivot to contractual offers.
  4. Determine how the offer will be paid for–for example, in advance with entitlements to follow or more of a utility payment method that pays based on consumption.
  5. Determine the key parameters of the offer. Reflect on “use it or lose it” and possible escalation situations.
  6. Decide what kind of currency the consumption model should use. This could be credits, tokens, vouchers, or some type of prepaid points or hours to track entitlement use. Guard against considering these as a universal currency. Instead, use a very specific list of services that can be purchased using this currency.
  7. Include more characteristics of value-based pricing as opposed to traditional cost-plus pricing. 
The Seven Steps to Creating a Professional Services Subscription
The Seven Steps to Creating a Professional Services Subscription

Common Challenges and Questions

There are a few common challenges organizations will experience when shifting to a professional services subscription model.

Integration

Integration is paramount to establishing a holistic view of the customer experience from the initial contact to ensuring a lifetime value and a delighted customer along the way. 

The golden thread of customer identification needs to be connected across the following systems:
  • Customer relationship management (CRM) 
  • Configure price quote (CPQ) 
  • ECMS
  • Professional services automation (PSA)
  • Pricing and finance tools 
  • Customer success tools 
  • Staffing and scheduling  
Dashboards for consumption analytics, win/loss, and renewal/churn also become higher priorities.

Scope Management

During the delivery of the professional services subscription, the entire delivery team needs to know the scope of work being delivered as well as the boundaries. Clear guidelines on when something exceeds the defined scope–which could in turn impact how the revenue is recognized–needs to be well defined. Risk management and scope management are a priority in transactional services and become an even higher priority for subscription services.
 
One of the common challenges when it comes to recognizing the revenue for the professional services subscription is the need for the project managers to fully understand the scope of work and to keep the delivery motion within that scope. Allowing for variation can lead to failing financial audits. For this reason, educating project managers on the ratable revenue recognition rules and the long-term impacts of this is very important.

Cross-Functional Collaboration

To help complete the cycle, customer success managers and project managers need to collaborate on where the customer is in the consumption and value journey. Clearly defined responsibilities in the form of responsible, accountable, consulted, and informed (RACI) charts are a must. Outlining when the customer success manager and project manager should be involved leads to key cost savings.

The Future of Professional Services Subscriptions

Based on a recent real time poll, more than 50% of companies responded as being “curious” or taking initial steps toward a subscription model for professional services. Others have had some initial success or are piloting offers. 
The Future of Professional Services Subscriptions
The Future of Professional Services Subscriptions
The vast majority of professional services organizations will develop renewable offers and continue to deliver traditional transactional offers. This hybrid model will be around for many years to come. Few will move over exclusively to renewable services.
 
Further out, there will be a need for two new offices:
  • The value management office will develop specific and structured customer value propositions spanning the current functional areas of professional services, customer success, and managed services.
  • The workforce management office will take on a new centralized role as extreme organizational convergence occurs across service lines. Resources will be selected based on their skills, proficiency, availability, and interest for a body of work to be delivered. That body of work could be considered professional services, customer success, or managed services.
TSIA’s point of view is to go into the professional services subscription model with the clear understanding that this is different. It requires a different approach across the various internal workflows and customer-facing interactions. 

Moving to a subscription model will require a new or, for some, a renewed focus on customer value. The move also puts new requirements on tracking and trending consumption of the professional services subscription entitlements.
 

 January 19, 2023

David Young

About Author David Young

David Young is the senior director of professional services research and operational best practices for TSIA. In this role, he is responsible for developing and delivering research programs that are focused on helping TSIA member organizations build and optimize professional services. He is also responsible for leading and delivering operational best practices to member organizations. David has over 25+ years of experience in technology, operations, analysis, project management, and consulting, including experience in hi-tech semi-conductor industry, software product development, program management and professional services working in large enterprise and small startup organizations.