The Siren's Song of Services
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May 31, 2001: Microsoft Chairman Bill Gates grants a live interview on CNBC's Squawk Box to promote Microsoft's latest software release. Two minutes into the interview, host Mark Haines asks about Microsoft's service strategy: Isn't Gates concerned that Microsoft doesn't enjoy the same level of service revenues as Oracle and IBM? Gates quickly responds that Microsoft is now offering new consulting services. A visit to the Microsoft web page confirms the new direction:
Microsoft Consulting Services Portfolio of Services
Microsoft® Consulting Services (MCS) provides services related to enterprise application planning, advanced technology, e-commerce, distributed network architecture computing, and customized client solutions. At every stage of the IT life cycle, you can count on Microsoft consultants for the experience, proven methods, and solutions to turn your vision into a practical and profitable business reality.
A quick search on Google using the keywords professional services and product yields hundreds of web sites for technology product companies that also offer professional services. In addition to Oracle and IBM, the list includes hardware manufacturers Alcatel, Aspect, EMC, HP, and Lucent. Compaq purchased DEC to acquire its well-reputed professional services unit. Novell recently purchased the independent consulting firm of Cambridge Technology Partners. Software companies are also getting into the act; PeopleSoft, Sybase, Informix, Pumatech, and Red Hat all offer various levels of consulting services. Hardware companies, software companies—they've all heard it, and they can't ignore it: the Sirens' song of services.
The Product Services Wheel
What exactly are we are discussing here? The incessant desire for product-oriented technology companies to offer more complex service offerings (see Figure 1).
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Figure 1 The Product Services wheel.
The Gartner Group has documented an interesting identity crisis that both product and service companies constantly go through: Product companies want to become service companies, and service companies want to become product companies. (See "There Is a Tide in the Affairs of Vendors: Product or Service Business?" Gartner Group, May 2000.) For product companies offering technology, the turning of the wheel begins with product services. These are services offered to support the core products of the company, commonly known as support services. But soon, the product company is tempted to move upstream. In particular, the siren call of potentially high-growth and high-margin consulting services for a product company is almost too tempting to resist, especially if the product company is experiencing erosion in product margins.
Service Types
If you visit the web sites of product companies such as IBM, HP, Compaq, EMC, and Silicon Graphics, you see very consistent positioning of their newly developed service offerings. All these product companies now offer at least four distinct flavors of services:
Support services. Basic break/fix support services that product companies have always offered.
Education services. Traditional product training offered directly by the product companies.
Managed services. Services focused on successfully implementing the core products of the company. Usually these services are tightly scoped and very similar from customer to customer. They're usually offered at a fixed price and are a natural extension of standard support services already being offered. In fact, support service technical staff often delivers these services.
Consulting (or professional) services. Services that move beyond implementation and into integrating the products of the company into the customer's business. These services may involve developing custom code to integrate the product into existing infrastructure, or consulting with the customer on workflow and business processes. To deliver these services, the product company must invest in new skill sets and business processes.
NOTE
In fact, the definition of professional services is very nebulous in the industry. Figure 2, shown later in this article, provides a helpful and simple way to visualize and classify the various types of service offerings in which product companies invest.
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Larger product companies like IBM and HP offer a fifth service, outsourcing, in which the product company literally takes over the day-to-day operations of a customer's technical environment. Table 1 provides a summary of the five types of services that product companies are now likely to offer.
Table 1 Types of Service Offerings
|
Service Name |
Description |
Tag Lines |
Pricing Attributes |
Length Attributes |
Proposed Benefits |
|
Support services |
Basic break-fix service for products of the company |
24x7, remote administration |
Fixed percentage of product costs; price is also driven by response time that the customer is willing to pay |
Annual contracts, life of product |
Insurance policy |
|
Education services |
Product training |
E-learning, web learning |
Fixed percentage of product costs or per class |
Measured in days of training |
Increased employee productivity, employee certification |
|
Managed services |
Standard services designed to help the customer implement the product faster or make the product more efficient |
Quick start, system tuning, performance analysis |
Fixed price per service requested |
From 1 day to 4 weeks |
Decreased time to implement new products, improved effectiveness of products already implemented |
|
Consulting or Professional Services |
Custom services designed to truly integrate the product offering into the customer's business |
Business solutions, best practices, turnkey integration |
Variable price, driven by the complexity of deliverables |
2 weeks to 6 months |
Improved ROI, reduced risk, reduced time to implement business solution |
|
Outsourcing services |
Product company provides staff to administer the product for the customer on an ongoing basis |
Staff augmentation |
Fixed rate per head |
Months to years |
Reduced costs, allows customer to focus on core competencies |
A Beautiful Song
There is good reason for these product companies to develop and offer all these new services: over half of all IT spending is on services! (See "IT Service Spending in the Crosswinds," Gartner Group, September 25, 2000.) Key customers often turn to their preferred and trusted product vendors to provide more and more of these services. According to the Gartner Group, this behavior is being driven by three key factors: the continuing shortage of qualified technical talent, the trend of companies to refocus on their core competencies, and the ever-increasing complexity of new technology that requires specialized expertise for successful implementation.
In addition to pursuing additional revenue opportunities, there are many sound business reasons for product companies to be interested in offering more than just product support services. The Information Technology Services Marketing Association (ITSMA) and others provide the following list. (Source: "Training Fish to Fly? Seven Tips to Convert a Product Sales Force to Solutions Selling," June 2001, www.itsma.com/education/prof_dev/pd_052901.htm.)
Client interest in business solutions as opposed to point products
Deeper client relationships and improved account control
Increased revenue per customer: 50–100% higher revenues from both products and services (source: "Should Professional Services Be in Your Company's Services Portfolio?" Shera Mikelson, Hahn Consulting)
Product pull through—the act of leading with service sales and then pulling product sales in
Increased margins
Greater implementation control
Improved customer satisfaction
In his book Living on the Fault Line (HarperCollins, 2000), technology-marketing expert Geoffrey Moore provides an updated list of why technology companies specifically need an internal professional services organization:
Help implement projects that advance the company's state of the art, featuring products that are fresh from R&D.
Do the gritty, unglamorous work behind the scenes that has to get done to make the system work right—the very work that independent consulting firms want no part of.
Develop domain expertise in one or more vertical markets to help differentiate the company's product offerings.
Moore states that by providing professional services, a product company can take on problems for long-established customers that no one else will tackle. "Not only does this help secure long-term loyalty and commitment, but it can also lead to the discovery of new market opportunities."
And in reality, there are benefits to the end customer. By providing consulting services directly, the product-centric company offers these advantages:
One-stop shopping for implementation
Hard-to-find product expertise and technical skills
Decreased time to complete solution
Allows customer to focus on their core competencies
Single point of contact
Single point of liability
These last two points are especially attractive to understaffed, overworked IT managers who already have enough vendor relationships to juggle. When Steve O'Connor was CIO at Silicon Graphics, for example, he drove his IT organization to work with a short list of seven strategic vendors. "I didn't feel my management and I could build effective relationships with more than seven vendors." The practice reclaims cycles for the IT management team and creates deeper, more productive relationships with vendors.
So with a win-win setup in mind, the product company cranks the product service wheel and begins offering new services to the customer. The customer buys them. And then the real fun begins—that is, the fun of actually delivering these services in a consistent and profitable manner. For most product companies, this is when the journey begins to encounter rough seas. Engineering and implementing products profitably is one set of skills; doing the same for services is quite another. The principles are often the same, but their application is very different. If not managed properly, the product company soon finds its hard-fought product margins being used to subsidize unprofitable service engagements.