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Phase 4: Productized Services
Please don't let the name scare you away. The concept of productized services is really quite simple. It's all about leverage. To enter this phase, a professional services organization must be committed to leveraging its valuable intellectual property. This section reviews how leveraging intellectual property positively impacts your business.
Value Proposition
When offering consulting services, the product company brought several cards to the customer table:
- Product expertise
- Technical expertise
- Business problem expertise
- Risk management
If the product company is disciplined enough to capture and quantify experiences from customer engagements, it can position risk management and expertise to a new level. By demonstrating proven delivery methodologies, the product company can greatly reduce the fears and risks of a customer. Also, the product company should have no issues establishing its credibility regarding a targeted solution.
Strategic Focus
As always, revenue remains a focus. References remain important. However, repeatability is the hallmark endeavor of the productized services phase.
Critical Skills
The most important skill set required to drive repeatable productized services is talented senior technical staff. These folks are the brain trust that validates technical architectures and delivery strategies. The stronger they are, the more differentiated your service offerings.
Marketing managers who understand how to position and market business solutions are also crucial to this phase.
NOTE
Product marketing managers and solution marketing managers are not the same. Different skills in different mindsets. Product marketing managers typically focus marketing efforts on differentiating product capabilities. In the world of computer hardware, this is marketing based on "speeds and feeds." Solutions are much mushier entities. They're often differentiated based on intangible concepts like "lower risk" or "improved employee productivity." Solution marketing managers must position at the business problem level; product marketing managers may design very successful marketing campaigns that never address a general business problem.
Required Operational Infrastructure
In this phase, we return to a project-level focus.
Required Operational Reporting
From a reporting perspective, the global organization must understand what projects are most profitable and why. These become candidates for productized services. Detailed project reporting is critical.
Required Operational Processes
From the process perspective, a new step must be added to the project management lifecycle process: the intellectual property (IP) capture process. Every geography must have delivery teams that are educated on how to capture and submit project IP that can be reviewed by the Services Engineering team.
Target Mix
Valuable IP should be managed and implemented by direct staff. This means that much of your revenue should be direct revenue. A target revenue mix of at least 60/40 should be the objective by this phase.
Revenue Growth Rate
Top-line revenue growth is much more challenging at this phase. The hiring and training of delivery staff is a longer and more complex endeavor. Revenue growth rates of 20–30% are manageable. Higher growth rates affect the quality of your service delivery.
Target Gross Margin
And now for some real upside. By aggressively managing a target solution portfolio, you can realistically expect to enjoy a target gross margin of 30% or greater. This is true for three reasons:
Customers are willing to pay a premium price for your well-referenced and valuable solution expertise.
Your delivery teams have become extremely efficient at delivering your target solutions.
This is the phase where you start to see revenues from reusable components like software.
Let's compare two fictional professional service organizations: Solutions 'R Us and We B' Solutions. One of the advantages of We B' Solutions is a high margin revenue (50% gross margin) coming in from reusable IP components. Look at the numbers in Figure 3 and see how much that component can help lift overall gross margins for the business.
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Figure 3 The scorecard for two professional services organizations with different revenue mixes.
Target Operating Profit
Now, for the best part. By offering productized services that are highly differentiated, you improved your gross margin. This leads you to a very respectable operating profit of 13%. The number speaks for itself.
So there you have an overview of the four phases through which a professional services organization and product company can migrate. Again, a critical success factor for professional service organizations is to clearly understand each phase, the priorities and challenges of each phase, and where your PS organization sits within the maturity curve.