Evolving role of professional services in software companies has been saved
Evolving role of professional services in software companies
Discover strategies and professional services trends
Software companies have traditionally focused their professional services offerings on deploying, customizing, and optimizing on-premise products. As companies shift to SaaS- and consumption-based models, they have an opportunity to evolve the role professional services plays to meet emerging customer needs.
Software industry trends having an impact on professional services
Across the software industry, we have witnessed the growing shift of customer preferences away from perpetual licenses deployed on-prem to as-a-service software deployed on the cloud or in a hybrid environment.
By the end of 2022 , more than 90% of global enterprises were relying on some form of hybrid (combination of private and public) cloud deployment1. Gartner estimates the market size of SaaS products and services was $123 billion in 2021 and is expected to grow more than 19% to $145 billion by the beginning of 20232. One of the main drivers of this explosive growth has been the increased ease and flexibility of deploying, maintaining, and scaling software solutions delivered via the cloud.
Relative to on-prem deployments, cloud-based delivery has reduced the complexity of configuring and operating the underlying software products. The simplest SaaS applications, targeted at smaller customer segments today, are broadly “plug and play,” with end users enabled by in-product guidance, on-demand learning, and community-led support. However, realizing the value of feature-rich enterprise software, especially when deploying complex use cases or driving adoption of advanced features, remains heavily dependent on the involvement of professional services to drive the initial deployment and enable internal teams for success. While the role of professional services was limited to one-time implementation of solutions purchased by customers, there is now an increased expectation to go beyond implementation and drive ongoing adoption by delivering business and technical outcomes, such as ensuring faster go-live through best practices and enabling a first use case within a certain time frame (e.g., 90 days). This introduces an opportunity to introduce new professional services offerings that provide deep technical expertise and on-demand guidance across the end-to-end customer journey.
At the same time, with annual recurring revenue (ARR) emerging as a leading measure of sales efficiency for SaaS companies, many have shifted focus to increasing the share of recurring (subscription- and consumption-based) revenue relative to one-time revenue obtained from traditional perpetual license-based models. Gross margins on mature products offered by SaaS companies typically exceed 75%3, much higher than margins obtained via on-prem business models.
However, based on a Deloitte professional services industry survey4 across 50–70 services organizations, gross margins on professional services vary widely, anywhere from +40% to –40% (figure 1) depending on the strategic role of Professional Services (PS) , pricing structures, discounting models, and labor costs associated with delivery.
This variance is due to the still evolving role of professional services within software companies: Some traditional computer and network infrastructure-oriented companies continue to view professional services as a profit driver contributing to the overall P&L, whereas many established SaaS companies are willing to temporarily sacrifice margins to grow product ARR. The trend is amplified by hyperscalers with consumption-based models who use professional services as a loss leader to drive new logo acquisition. Additionally, some companies that frequently deploy highly complex and scalable enterprise solutions offer free or heavily discounted professional services as part of an initial discovery phase to reduce time to value for their largest deals.
Overall, in the context of SaaS- and consumption-based deployments, we are seeing a shift in the focus of professional services organizations from direct profitability to enabling customer outcomes and thereby driving expansion of recurring product revenue.
An additional trend we have observed is a decrease in attach rates, or professional services revenue per dollar of product revenue sold, for cloud and hybrid deployments relative to traditional on-prem software deployments. Although it varies by product category and customer segment, average attach rates for SaaS- and consumption-based solutions are frequently around 0.25x–1.5x, much lower than the 2x–3x attach rate for on-prem deployments (figure 1). Focusing on adoption and expansion is a relatively new sales motion for services sellers. As such, professional services tends to take a back seat after the initial implementation (which itself is typically a smaller deal due to the reduced complexity of implementing SaaS and cloud-based software).
Additionally, some companies may use channel partners to deliver low-margin services to drive scale at low cost. As a result, the typical size of the professional services organization, by revenue, has also decreased and is generally less than 20% of overall revenue for companies that predominantly provide cloud-based software offerings. This presents an opportunity to introduce new professional services offerings, such as adoption and optimization services, and educate and enable sales and customer success teams to attach PS offerings beyond the initial deal. (We will delve deeper into outcome-based service portfolio strategy in an upcoming paper.)
Strategic choice points for software companies to consider
The expanded role of professional services in realizing full potential of the deployed cloud solution, together with near-term pressure on financial metrics, presents organizations with several strategic choices to consider around offering design, GTM, and operating model.
Winning moves to evolve the role of software professional services
As discussed earlier, SaaS companies are increasingly realizing that customers in the commercial and mid-market segments need professional services support to realize the value of their deployed solution. However, the enterprise sales and delivery motion for professional services can be highly labor and cost intensive and does not scale to serve these new segments; additionally, the traditional emphasis on implementation leads to a lack of focus on adoption, which is required to sustainably drive recurring revenue. SaaS- and consumption-based software companies that aim to drive adoption and target new segments can benefit from five winning moves across their value chain from strategy to delivery.
Keep the professional services evolution going
While the nature and boundaries of professional services organizations within software companies are evolving rapidly, it is important to note that there is no one-size-fits-all for professional services organizations, and leaders must continue to evolve in line with the shifts in overall corporate strategy. Professional services teams will need to gain incremental capabilities and adapt to new offerings, packaging, pricing, operating models, GTM, and measurement practices but will remain a key strategic instrument of driving revenue growth and product adoption for SaaS- and consumption-based software companies.
1 Deloitte, “The cloud migration forecast: Cloudy with a chance of clouds,” December 2020.
2 Gartner, “Gartner forecasts worldwide public cloud end-user spending to grow 18% in 2021,” November 2020.
3 Software Equity Group, “The impact of gross margin on SaaS valuations,” March 2021.
4 Deloitte, Deloitte Professional Services Industry survey, February 2022.
5 “Driving sustainable and repeatable growth in Enterprise SaaS”, April 2022
6 Splunk, “Success plans,” August 2022.
7 Salesforce, “CS and PS offerings,” August 2022.
Customer outcomes: Chief Customer Officer study
A new focus for B2B technology companies
XaaS Models: Our Offerings
Making the shift to everything-as-a-service