Source

Harvard Business Review Putting Products into Services, by Mohanbir Sawhney

Analysis

High-end professional services firms, unlike product companies, traditionally experience only linear revenue growth. That’s because selling more services means adding more professionals, which limits profit margins.

And this growth is complicated by the chronic talent shortage hitting every business services sector I’ve encountered. If the firm is owned by anyone other than comfortable, near-retirement founders, the leadership is likely under pressure to grow revenue and margins faster than the status-quo allows.

By leveraging the power of algorithm-driven automation and data analytics to “productize” aspects of their work, a number of innovative firms are finding that, like Google and Adobe, they can increase margins as they grow, while giving clients better service at prices that competitors can’t match.

Efficiencies increase, and nonlinear scale becomes feasible as productized services take over high-volume tasks and aid judgment-driven processes. That frees up well-paid professionals to focus on jobs that require more sophistication— and generate greater value for the company.

But this is easier said than done. Investing in technology is hard. Many a technology project has failed and cost the firm millions (for truly large firms, even billions) of dollars and yielded no results!

Yet…

Professional services firms have the advantage of already knowing what they’re marketing and whom it’s for. These companies aren’t creating something out of nothing; they’re converting something (a service) into something else (a service with embedded products).

Startups do not have this luxury. A services firm has no market risk, no channel risk, and a host of friendly clients to test early iterations of a product with! If you find the right technology partner, then you can greatly mitigate the product risk.

Of course, none of that matters if your managers and employees fight the adoption of the product every step of the way…

If your firm’s services have become more efficient or effective, it doesn’t make sense to continue with a pricing model that’s based on time and materials. Indeed, if the goal behind productizing services is to push beyond a linear growth rate, you must change your monetization model— or risk getting paid less for your work.

Most business services firms bill clients, and pay their employees, based on “billable hours.” But the kinds of technological enablement we’re talking about decrease billable hours for a given project. Almost no one in the company will support these innovations if it cuts their compensation or threatens their jobs.

We’ve found our clients thrive when they switch away from hourly and to value-based pricing for services aided by technology. With the right technology they can double or triple margins and offer their clients lower prices and pricing certainty. It is also critical to show that there is more work then there are hands to do it anyway. So far from taking jobs away, we find this kind of tech saves jobs and leads to higher compensation.

But it is important to remember that…

Services remain the center of gravity, and customers continue to buy the service offering, not the product per se. From the customer’s perspective, little changes other than the pricing of the service… Embedded products do not replace service offerings; instead they strengthen the value proposition that service offerings present.

When thinking through which services to super-charge with tech…

The tasks that meet two criteria—they’re performed frequently and they require little sophistication—are the low-hanging fruit for productization.

Yes! And once identified, at PixelEdge we employ a 3-step process to productizing those tasks for our clients in business services:

1. Make a tool for their internal use that makes employees more productive and generates a positive ROI quickly.
2. Add client-facing data visualizations and interfaces that provide greater value to their clients, helping the their sales team close more work and maintain pricing.
3. Add self-service capabilities that allow their clients to use a version of the product, creating high-margin subscription revenue and de-facto lock in for follow-on services.

My Conclusions

• The talent shortage isn’t going away, so firms need to embrace tech to grow.
• Few firms are embracing tech, creating tremendous competitive advantage for those that do.
• While there are lots of ways to do this wrong, there are also clear best practices on how to do it right!