It’s commonly thought that professional services for X-as-a-Service (XaaS) is different from professional services (PS) inside of traditional companies. But just how true is that statement? In this year’s “State of Professional Services” white paper, we concluded that 2014 had been a banner year for technology professional services organizations, with the prospects for 2015 being generally very good for the following reasons:

  • Generally improving professional services fundamentals
  • Better utilization, revenue per consultant, growth rates, and profitability
  • Better fundamentals regardless of peer group
  • Strong performance in the XaaS peer group

The last point is especially significant, considering all of the conventional wisdom about services business models for XaaS and SaaS that suggests SaaS professional services is “not supposed to make money.” Not to mention the fact that settling on the right services operating and financial models for XaaS isn’t exactly easy. However, the accumulating evidence to the contrary is pretty clear and stands in stark contrast to these assumptions, In fact, more and more professional services leaders are figuring out how to grow revenues and make money alongside a shifting product consumption model

Professional Services and the Cloud

TSIA cloud 20 index  

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Table 1: TSIA's Cloud 20 Index.

Table 1 is taken from a recent TSIA Cloud 20 webinar. The point of this chart is simple and reinforces a specific finding from the TSIA Professional Services Benchmark Study: some of the fastest professional services revenue growth is coming from the XaaS sector of the technology services industry. I’ll admit, some of this is high growth off of relatively small bases. For example, Demandware’s professional services revenue increased pretty dramatically, over 200%. Then again, look at the very strong growth registered by the company that has the largest PS business on the chart: Workday. Here we see over 40% year-over-year revenue growth for PS off of a pretty large base to begin with.

Of course, professional services revenue growth is typically not an end in itself, especially for technology companies mainly focused on expanding their reach and product footprint. Conventional wisdom encourages XaaS providers to view services mainly as a customer success play. But the data, case studies, and examples shown in Table 1 are increasingly demonstrating that the choice between customer success and professional services growth and profitability is a false choice.

Looking at Industry Comparisons

Public data does not give us visibility into the financial performance of individual services lines, but we do have evidence, as mentioned above, from the Professional Services Benchmark data. Table 2 shows a summary of key metrics from the XaaS peer group.

xaas professional services peer average  

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Table 2: Key XaaS – Industry Comparisons.

This is a small selection of key metrics, but it’s also extremely revealing. Professional services inside of XaaS providers is decidedly smaller than in the overall industry—deals are smaller, revenue contribution is smaller, professional services organizations (PSOs) themselves are generally smaller. Yes, as mentioned, growth rates are higher, owing partly to the fact that the growth is occurring off of a smaller base.

But otherwise, the XaaS professional services organization’s performance is comparable to, or better than, that of the average technology company in the TSIA database, and two interrelated differences stand out. Firstly, XaaS companies average 87% rate realization versus 79% for the industry overall. That means there is only a 13% net difference between the target rate for professional services and the ultimate achieved rate, including discounts and project leakage, versus 21% difference as an overall industry average. Partly for this reason, XaaS companies are bettering the industry project margins by 5 percentage points, on average. These differences are dramatic and worth monitoring over the coming year.

So is Professional Services for XaaS Really That Different?

All of this also constitutes evidence that the discipline of technology professional services is incredibly resilient and self-correcting. The challenges highlighted in TSIA’s book, B4B, and by the last few “State of Professional Services” papers are not trivial. XaaS consumption models create real problems for services operational and financial models. But the evidence is mounting that PS leaders are adapting, and succeeding. A big part of our focus next year will be on continued validation of this observation and in deepening our understanding of how the XaaS companies are achieving these impressive results.

To some extent, the question lacks real mystery. For two to three years now, we have been delivering a consistent message to PS leaders: the pressures of consumption economics and now B4B mean that you have to defend and protect your Level 2 professional services business, while at the same time explore ways of adapting, transforming, and gearing up for a Level 3 to Level 4 PS business. As we look forward into 2016, it appears as though this is exactly what the industry overall is doing, including that segment of professional services organizations that, by all rights, should be most firmly entrenched in the “belly of the fish,” the XaaS providers.

So the answer to whether professional services for XaaS is “just different” is, well, yes and no. It is different, but not so much so that the laws of PS physics don’t apply. PS leaders in XaaS firms or traditional product companies transforming to XaaS would do well to keep this in mind as they build their professional services strategies.

 
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Bo Di Muccio

About Author Bo Di Muccio

Bo Di Muccio, Ph.D., is the distinguished vice president of research, Professional Services, for TSIA. He is also the chairperson of the TSIA Professional Services Advisory Board. Using his nearly 15 years of experience in technology industry research, analysis, and consulting, Di Muccio develops and delivers research and advisory programs that help some of the world’s leading technology companies build and optimize their professional services business.

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