There’s a “mega trend” occurring in the technology industry that’s accelerating at an impressive rate, and that’s increased demand for “service-based consumption models”, or XaaS. Customers are changing how they choose to procure technology, focusing primarily on individual services and outcomes rather than products. As a result, product-based companies are experiencing declining product revenues while their services revenues are on the rise. It’s becoming clear that embracing an XaaS model as part of your managed services business can help increase your company’s revenue potential.
The Top Performing Technology Companies are Shifting from Products to Services
The best way to gauge current trends in the technology industry is to take a look at the TSIA Service 50. This is a sampling of the 50 top performing technology companies, which includes hardware, software, and services companies, and their gross margins. Their performance is a key indicator of what’s happening in the industry, and here we can see that like many other companies, the TSIA Service 50 is experiencing flat or declining product revenues.
(Click image to enlarge.)
Product revenues for Q1 2011 - Q3 2014.
Product revenues have continued to decline in a linear model over the past three years, representing a decrease of over 53 billion dollars for just these 50 companies alone. We also see that 2/3 of these companies have also had significant growth in services revenues. Here’s a snapshot of the trends in services revenues over the past three years:
(Click image to enlarge.)
Service revenues for Q1 2011 - Q3 2014.
If these top performing companies are experiencing this pattern of declining product revenues and rising services revenues, it’s safe to say that customer desire for service-based consumption models is an industry-wide trend that will continue to grow.
What This Means for Managed Services
Though this is largest industry shift we’ve seen in awhile, we’ve addressed the growing need for companies to offer more services before in TSIA’s books, as well as the white papers we’ve authored for our members.
(Click image to enlarge.)
Software is eating hardware, and services is eating software.
What we continue to see is that as hardware gives way to software centricity, there’s a complexity that naturally happens within the product set. There’s very little hardware left anywhere in the technology industry that’s untouched by this move toward software centricity. Whether it’s IT technology, industrial engineering and infrastructure, manufacturing systems and robotics, or imaging systems for hospitals,
everything’s becoming very software-centric and, as a result, more complex for customers, who then need more hands-on support and additional services to help them achieve their outcomes. As software eats hardware and services eats software, we’re left with a services-centric world.What we continue to see is that as hardware gives way to software centricity, there’s a complexity that naturally happens within the product set. There’s very little hardware left anywhere in the technology industry that’s untouched by this move toward software centricity. Whether it’s IT technology, industrial engineering and infrastructure, manufacturing systems and robotics, or imaging systems for hospitals,
everything’s becoming very software-centric and, as a result, more complex for customers, who then need more hands-on support and additional services to help them achieve their outcomes. As software eats hardware and services eats software, we’re left with a services-centric world.
Managed services is eating everything else!
Incidentally, managed services is eating everything else, and as consumption models change, that’s when we see the focus shift toward XaaS. MS is changing from staff augmentation, to on-site custom managed services, to remote managed services, and those are giving way to XaaS models. Managed XaaS is technology, professional services, support elements, and all of the operational functions embedded into a single turnkey managed services offering, and it’s this packaged offer that is becoming the most desirable option for customers.
Opportunities for Managed XaaS
Customer demand is the driving force behind what turns a Level 1 and Level 2, or product-based supplier, to a Level 3 or Level 4 service-based supplier. In TSIA’s latest book, B4B, we talk about how companies have historically had a “make, sell, ship” model, but as products have become more complex, businesses have started building higher value-added services (VAS) in order to keep up with customer demand for increased supplier involvement in helping them achieve their outcomes.
There is a major opportunity for growth for either products or services, and that is to begin offering service-based consumption models, where customers consume through subscription, which falls under the umbrella of managed services. As more companies are being driven into the XaaS marketplace by the changing needs of their customers, the ones that embrace this change are the ones that end up growing at exponential rates, and with this change they must make some realistic decisions on the types of solutions they’re going to offer their customers going forward.
You can learn more about the above concepts and more by watching my on-demand webinar, Managed XaaS: The Evolution of the Tech Industry, where I go deeper into what’s driving this shift in the industry, as well as what trends we are expecting in the near future. Later this month, I will also be publishing a white paper by the same title, so be sure to keep an eye out for that if you'd prefer to keep a text version of these findings on hand. If you have any questions about the content of this post or any general inquiries about the current state of managed services, feel free to reach out in the comments below.