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Phase 3: Consulting Services
Implementation and integration services are all about technical expertise. Consulting services are about business expertise. The first question to address is why a product company would ever want to stray beyond services closely related to their product. The answer is purse strings. Who owns the purse strings? The technical staff of a customer greatly influences what products are purchased and who implements them. But often, the technical staff doesn't have the checkbook. The person paying to solve their business problem has a checkbook. This person cares about business problems. If the product company can converse on this level, they have greater control over their fate in the account. Hence, the birth of consulting services.
Value Proposition
By this phase, the product company has already established its value proposition product expertise, risk reduction, and specialized technical expertise. By moving upstream and offering more general consulting services, the product company must demonstrate business problem expertise to the customer. The more targeted this expertise is, the more credible the argument.
To illustrate this point, let's take the example of customer relationship management (CRM) systems. Your company makes a CRM software product. When offering integration services, your company provided the project management and technical skills required to successfully implement your product and integrate into the customer's other software systems. Your proposals all dealt with implementing your product. Now, you want to" consult" with the customer to help them make the best business decision. You want to apply all your experiences around CRM packages and how companies can best choose, implement, and leverage them to your current customers. You want to talk strategy before tactics.
Strategic Focus
As previously mentioned, revenue never drops from the radar screen. In this phase, references also remain critical. But, for the first time, repeatability must gain some mind share. To be credible on a consulting level, you must be able to demonstrate pattern recognition to your customers. You must be able to show what has worked—or not worked—for like customers. This requires a new level of knowledge management. Previously, best practices and knowledge sharing between delivery teams was nice to have. Now it's mandatory.
Critical Skills
To break into this phase, you need to hire a new skill set into your delivery teams: business consultants—people who are comfortable with the technology but are focused on the business strategies of your customers.
At this point, marketing managers also become crucial. You need people who can spin your story. In previous phases, customers could be convinced with references and data sheets. Now you're selling higher. You're pitching vice presidents and CEOs. You need someone who can help soften the obstacles you may face in the selling process. You need some air cover!
Required Operational Infrastructure
Both your reporting and process needs will be focused on your individual delivery employees. Their numbers and skills have grown. Their expenses have also grown. You need to optimize these resources to guarantee profitability.
Required Operational Reporting
Individual time reporting: This is infrastructure that many consulting firms implement at conception. Not a bad idea. But, for the product-centric company employees, time reporting is an alien concept. Only after reaching a certain level of business maturity does it really makes sense to push this concept. Now is the time.
Required Operational Processes
To maximize your expensive human resources, you need a professional development program. For your technical staff to be effective and your projects profitable, your staff needs technical training. For your new business consultants to be credible, they need training in best practices. Relying on grassroots, trial-by-fire training is not the best strategy. Your customers will not be appreciative.
Target Mix
By the time you reach the consulting services phase, you should have developed a robust delivery organization. Your direct billable staff should be responsible for 50% of your revenue streams. This means you're looking at a 50/50 revenue mix.
Revenue Growth Rate
Top-line revenue growth is now more challenging. With a 50/50 revenue mix, you're more dependent on scaling your delivery teams to capture more revenue. This slows the revenue growth rate you should expect. Rates of 50–80% are very acceptable.
Target Gross Margin
Again, your improving revenue mix will drive improving gross margins. Gross margins of 18–22% are achievable in this phase.
Target Operating Profit
Welcome to the promised land of profitability! A healthier revenue mix drives a better gross margin. A better gross margin drives dramatically improved operating profit. In this phase, you should expect to see some positive cash flow. Operating profits ranging from breakeven to +4% are within reach.
Finally, things are looking up! Your professional services organization is actually making money and not losing money. But there is a better place to be—a place where margins grow higher and profits are like rain. The place of productized services.