Evolving role of professional services in software companies

Within software companies, professional services typically refers to an organization of technology and solution experts engaged in delivering technical advisory and implementation services for their customers. As the size of traditional professional services deals (product-led, project-based, implementation-oriented services) decreases with increased demand for cloud-based deployments, companies are investing in new capabilities and repeatable, scalable offerings to stay relevant. This is manifested in the fact that services are being made available in more bite-sized, on-demand packages, at lower costs and with rapid delivery to meet changing product needs and customer preferences. Across the spectrum of software companies, the emerging portfolio of professional services offered can be broadly classified into four types across the customer life cycle:

• Visioning services are focused on understanding customer needs, which are often 100% funded by the solution provider as a cost of the sale. Depending on customer size and level of vendor investment, these services could be delivered as high-touch engagements (e.g., visioning workshops) or digital tools (e.g., online surveys that measure organization, process, and tooling maturity) with the same goal of accelerating sales deal velocity and teeing up follow-on professional services engagements at higher value and margins.
• Assessment services help customers evaluate current-state technology and tooling landscape and design SaaS- and consumption-based solutions that help deliver desired customer outcomes. These are generally sold at cost or low margins to get customers through the engagement funnel to high-margin activities.
• Migration and adoption services leverage industry best practices and technical and solution expertise in the professional services organization of the service provider to help customers deploy, integrate, and configure solutions, migrate data, and go live faster. The margin for these services increases to between 20% and 50% at maturity and sees increased partner involvement in implementation to reduce costs.
• Optimization services leverage usage data to proactively work with customer teams to build hands-on product experience, accelerate adoption, automate business operations, and shape business outcomes. These services are the most profitable, with margins up to 60% at maturity, but also play a critical role in maintaining customer retention and, hence, driving up Net Dollar Retention Metric (NDR)⁵.

For example, Splunk⁶ has invested in launching a portfolio of lightweight, prepackaged, on-demand advisory, implementation, and education services that most customers are entitled to via a success plan embedded in their product purchase. Customers receive credits on a recurring basis, which they can burn down to purchase specific tasks (e.g., build a new dashboard) in Splunk’s predefined service catalog that enable success across the customer life cycle.

From a GTM perspective, the addition of new routes to market for SaaS/cloud products (e.g., e-commerce platforms and cloud marketplaces) enables companies to increase their total addressable market by targeting new customer segments (e.g., mid-market, small and medium businesses). However, given the lower average deal sizes common within these segments, the repeatable, scalable offerings outlined in the prior section are a prerequisite to targeting them.

In addition to building a network of professional services partners to supply low-margin, implementation capacity, we see companies embracing partners to develop industry-specific solutions that are valued at a premium by customers, thus increasing the overall marketing and sales capabilities for product license growth in addition to services.

The evolving role of professional services organizations in SaaS- and consumption-based companies means that the lines between professional services, customer success, and sales are often blurred. Increasingly, customer success is emerging as a persistent, proactive orchestrator, focused on building long-term relationships with the customer’s IT and business stakeholders and driving adoption across entire customer life cycle. In turn, professional services leverages specialized technical and product expertise in time-bound engagements to accelerate time to value of new releases and expand the number of deployed use cases. However, it is not unnatural for companies to be challenged by friction between these functions, and we observe distinct strategic choices in response.

Companies with highly configurable, cloud-based platforms such as Salesforce have unified professional services under the broader umbrella of customer success to provide expertise, accelerate time to value, boost adoption, and improve customer experience⁷. Breaking down internal functional silos allows for greater sharing of technical expertise and clarity in roles and responsibilities across customer touchpoints required to operationalize and deliver seamless customer experience.

Alternatively, companies with a more complex portfolio mix of IaaS, PaaS, and SaaS offerings deploy a well-defined engagement model in which collaboration between customer-facing service functions is incentivized and the role of professional services is expanded to be an enabler for delivering customer outcomes. Mutually beneficial positioning, in which customer success identifies opportunities to expand service coverage and professional services is pulled through to provide deep technical expertise, drives higher adoption and, thereby, likelihood of retention. This also means companies need to measure the success of professional services organizations beyond margins and through metrics, such as a combined scorecard consisting of customer success and professional services metrics with shared accountability.

While a full-scale PS transformation that includes reimagining the service charter and traditional ways of doing business may be required in companies transitioning to SaaS- and consumption-based models, we observe five winning moves that can set up professional services organizations to deliver on desired customer outcomes and positively influence expansion of recurring revenue.

Set a clear professional services strategy in the context of overall customer outcomes and influencing NDR: First, articulate the strategic role of professional services as a driver of product adoption, and align capabilities, staffing, and stakeholder expectations accordingly. This could also mean measuring time to value for PS engagements, long-term adoption, or customer health metrics and, from an operational perspective, potentially having lower utilization targets to account for time spent on adoption activities. Based on product and business goals, tie professional services outcomes to customer success, and measure broader-impact metrics delivered across the customer life cycle.

Develop prepackaged offerings: Second, invest in development of prepackaged service offerings that can be marketed and sold to SMBs and commercial-tier customers at a lower cost of delivery without slowing down the deal velocity. This follows Deloitte surveys that highlight growing customer need and willingness to pay. So, the onus is on providers to make it easy for these customers to buy and consume professional services offerings. This can take the form of predefined engagements, digital tools, and execution frameworks, among others. Figure 5 shows the increasing use of prepackaged offerings for geographic regions and customer segments with low affinity for premium range of services.

Introduce flexibility in margin targets across the customer life cycle: Third, vary margin targets to increase stickiness across the customer life cycle. Gain customer mindshare through upfront investments in deal cycle, and recover margins as solution offerings mature over time. As shown in survey results in figure 3 below, nearly 78% and 65% of software companies are providing visioning and assessment services, respectively, as an investment or at break-even cost.

Introduce value-based pricing: Fourth, for large, routine, late-stage engagements with enterprise customers, consider employing value-based pricing that aims to maximize profitability to make up for margins lost in the early stages. At the same time, for SMB customers, use cost-plus pricing that provides full cost coverage and hedges against customers’ unwillingness to pay at future engagement stages. Figure 4 shows the increasing use of value/outcome-based pricing models by software companies at late-stage professional services engagements.

Rethink talent model, skills, and delivery centers: Finally, executing these changes requires fundamental shifts in the skills needed, organization design, and use of delivery models, such as outsourcing and partners. For example, companies are identifying predefined, skills-based technical advisory services (e.g., guidance for advanced product adoption, optimization services) that can be performed by a pooled set of resources from a near-shore delivery center. Companies are already capitalizing on strong software engineering talent in Asia and Eastern Europe to improve cost mix and access to in-demand skills.