SmoothSpan Blog

Ben Worthen of the WSJ writes that the first thing tech companies are pitching is “professional services.”  On the question of why, his answer was:

Because the margins are often higher than in software and tech equipment, John W. McCain, vice president and general manager of H-P services, tells the Business Technology Blog. That’s especially true for strategic consulting. Plus consulting gigs are a great way for tech companies to sell more of their products. McCain says that his consultants often recommend H-P products to help clients address the problems the consultants identify.

The margins are higher than software perpetual license sales?  I find that very hard to believe, at least with respect to gross margins.  IBM itself, mentioned in Worthen’s article, continues to find more profit in software than consulting, not that they don’t continue to build their consulting business.  The real reasons are alluded to when McCain says it helps sell the other products.  It would be hard to sell the other products unless there was a great customer experience going on there.

Professional Services can deliver many of the advantages of SaaS when properly deployed.  Creating a better customer experience can lead to more product sales.  In fact, for an on-premises perpetual license company, Services are the key to customer experience and satisfaction.  A well-run Services organization can make sure the customer succeeds.  Unfortunately, this is difficult to do and still maintain high Services margins, so there is often a tug-of-war over what’s more important.  If your company is starting out and still trying to build its reputation, you’ll have to give away Services to help build that reputation.  If you have a customer that gets into hot water, you should give away more Services to fix the problem if you value that relationship.  Most software companies, surprisingly, won’t.  Hence we have the huge crash and burn projects that have surrounded companies like Siebel, Oracle, and SAP where customers sometimes even resort to law suits.  Adding a System Integrator clouds things even more because the SI is never incented to give away services on behalf of the software vendor.

SaaS realigns this mess around customer satisfaction.  Typically there will be no boil-the-ocean project to install SaaS–that’s a non-starter.  The service component of SaaS is indistinguishable from the software piece for the most part, so we don’t have the conflict of a Service Group being asked to give away free service to make a customer happier when they’re paid on margin for their Services business.  Lastly, there are fewer opportunities for SI’s and the customers themselves to get themselves into hot water.

The other poor man’s SaaS result of Professional Services is recurring revenues.  At least for the term of the engagement, payments keep coming.  Smart Services people somehow manage to make that term almost infinite as they find more to do when the original goals are met.  Service’s revenue has become the life ring that sustains quarterly results as perpetual license sales have been flagging and unpredictable.

If you have a perpetual software business and you’re wondering about SaaS, ask yourself how well you’re running your Services business first.  Are they an integral part of increasing customer satisfaction?  Or are they simply a profit center that’s decoupled from the software piece?  Until you can focus them on customer sat, it’s hard to see how you’ll do very well at SaaS.