Part II – The Professional Services Strategy Component of the B2B/Enterprise Software Success Formula
Welcome to the long overdue (clients come first, right?) Part II of the series of articles that examine what it takes for the Professional Services Organization (PSO) arm of a B2B/Enterprise Software company to be successful.
Let’s quickly review the formula: S + C + E + P / CIR = PSO Success
The focus of this article will be on the S component of the formula. The S stands for….Strategy – the Professional Services strategy to be more exact. Let’s take a deeper look into this critical component that will set the stage for many decisions which will undoubtedly affect the structure and set up of the other components of the formula.
Your Professional Services (also known as Onboarding, Installation, Delivery or Implementation) function exists for one reason and one reason only: To get your customers to successfully utilize your product/s. I will go as far as saying that if this not the case, you are off track already. Having established this foundational element, it’s time to explore how this is done. After all, how difficult can it be, right?
More difficult than meets the eye at first glance. Unfortunately, there is no “1 size fits all” solution. Keep in mind that Professional Services should be part of the overall strategy of your software company. What is important to you overall? How do you make money? What is the desired ratio of PS revenue vs. overall revenue/ARR? How difficult is it to get customers “live”? These are the 4 basic questions you need to be asking yourself. Based on these simple questions (there are never simple answers, though….), you have the following choices as the PS Leader:
Set your function up as a “Profit Center”
Set your function up as a “Cost Center”
Set your function up as an “Enabler”
Set your function up as a “Hybrid”
Profit Center
This model focuses on maximizing services dollars & margin. Pure consulting firms utilize this model, but it is also common for software companies where implementations are difficult and have long (i.e. multiple months +) timelines. Think of ERP installations or software products that need to get customized or need much configuration to be successful. The pure Profit Center model for Professional Services is a “dying” breed for software companies in general (especially in the SaaS world), but they will continue to exist and are successful in the right circumstances.
Cost Center
This model is on the complete opposite side of the spectrum from the previous model. Here the focus lies elsewhere – PS is not considered a revenue generating entity. This model works when implementations are quick, easy and don’t need much “hand-holding” all the way to a “customer self-service” or “Plug’n Play”. I would advise against deploying this model if your implementations don’t fall into this scenario. Not charging for implementations (that take real effort) can have unexpected side effects. If it’s free, there is no perceived value. If it’s free, your customers won’t make it a priority or assign necessary staff towards the successful implementation. So dread lightly! Fortunately, you have some other options….
Enabler
instead of focusing on the financial aspect of the implementation, the goal of this model is to get customers live – to have your customers successfully utilize your product/s on a day by day basis. The focus of this model is to “start the clock” on generating software revenue, i.e. ARR (Annual Recurring Revenue) as quickly as possible. Typically that clock starts post go-live, but I have seen recent examples where it starts at the beginning of the implementation. That can be a brilliant move assuming you don’t have much competition, or customers see value from your product quickly and implementations don’t take much time (think days/weeks vs months). Here you have a choice of whether you charge a reasonable implementation fee or you can build the cost (+) into your overall software licenses. This model is very popular in the SaaS space.
Hybrid
This model falls somewhere on the very wide spectrum between the Profit and Cost Center model. You could argue that the Enabler model falls into that category and you would be right. The software world is seldom black or white (revenue vs cost) so choosing a model that works for your specific situation is key and wildly popular. Maybe you charge for your services to make a 10-20% overall Services margin. Maybe you charge just enough to cover your cost to break even. Much comes down to the complexity of your product and implementations, perceived and actual value and industry dynamics.
Choosing the right model is a strategic decision that can have major impacts on you as a software company. It warrants much analysis, discussion and alignment and should therefore not be taken lightly.
Here is the good news – you can always pivot and make changes to your model as your particular situation changes – or needs to change. It will of course take some time and is typically much more difficult as you move from a “free/cheap” model to a “chargeable/expensive” model (vs. the other way around) in the eyes of your customers and prospects.
Stay tuned for the next article that focuses on the “C” part of the formula. Any guesses what the C stands for? In meantime, I would love to hear your comments, thoughts and questions. Which model does your PSO deploy – or should?