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“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:
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.
With input from our members across TSIA practices, the following taxonomy should help set the stage for a common industry definition for subscription services.
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.
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.
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.
Interested in optimizing your professional services strategy? Watch this Webinar on the topic or get in contact with us to learn how TSIA can help you with next steps.
January 19, 2023
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.
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