Should Professional Services Be In Your Company’s Services Portfolio?
By Shera Mikelson


Do you notice anything different about the column this month? That’s right, the authorship has changed hands from Al Hahn to me, Shera Mikelson. New face - same philosophy. I have been a senior consultant with Hahn Consulting, Inc. for about one and a half years, and previously had the privilege of being mentored by Al as my career in Service Marketing advanced within several companies. Now, with the blessing of The Professional Journal, Al has passed the pen to me. I appreciate the honor of carrying on this column and look forward to hearing from you, the readers, in the future. So, let’s get started...

Lately there’s been a lot of buzz about professional services. While many companies are looking at enhancing their current professional services, many more are considering plans to develop some for the first time. How do you decide whether or not your company should take the plunge into the professional services area? And if you’ve already begun, how do you make the right decisions along the way? At Hahn Consulting, we often use what is called a SWOT Analysis to help clients with these types of questions. No, SWOT is not a misspelling, and no, it does not refer to a police Special Weapons And Tactics (SWAT) hostage negotiation team. Rather, it is a marketing tool that looks at the strengths (S), weaknesses (W), opportunities (O), and threats (T) pertaining to a market situation.

STRENGTHS

What are the strengths of the professional services market? A high growth rate is certainly a strength. Today, the growth rate of hardware, software, and professional services has reversed. In the past, the majority of services sold were to support hardware. A smaller amount was sold to support software, and the least amount of services sold was in the area of professional services. Today, however, advanced consultative services are enjoying the largest growth rate, software services have medium growth, and hardware services are experiencing zero to small growth (Figure 1).

Figure 1: Growth Rate of Services

Source: Hahn Consulting, Inc., 2001

Strong customer demand is another strength. The interest in professional services is not just a matter of companies wanting to increase revenue by selling their services. Rather, it is customers who are now recognizing the profound effect of consultative services on their overall success and are driving the growth. Today, around the world, customers want to buy a total solution for their business needs. In many cases, it has become a matter of necessity.

WEAKNESSES

Now let’s consider some of the weaknesses of this market. For starters, there is confusion over the definition of professional services. To most people outside the high-technology industry, this term applies to the services provided by doctors, lawyers, and psychiatrists. Within our industry, some define these as consulting engagements, some as advanced services that go beyond the traditional break-fix activities, and some include implementation programs and training courses in the definition. As yet, there is no right or wrong definition.

Overall, professional services have not reached the level of margins that had been hoped for or expected. While traditional services margins tend to be about 35%, professional service gross margins have been running at 15% to 20%. This translates into barely breaking even. Much of the margin problem comes from an over-focus on the Fortune 100. With all of the top-name vendors vying for the business of these same 100 companies, the well-trained negotiators within these companies have been able to turn the market into a bidding war, driving prices and margins down. At the same time, many vendors are seriously underestimating the size of professional service engagements. Here’s a startling statement made by the Gartner Group in a December 1999 Gartner Research Note: "Estimating effort and cost through 2004, 50 percent of MSE ERP implementations will underestimate project effort and cost by at least 100 percent (0.7 probability)."

OPPORTUNITIES

Opportunities abound in the professional services market. As the flexibility and customization of a solution increases, so too does the portion of the customer’s budget spent on the services necessary to realize the customization. Industry statistics on the breakdown of customers’ IT spending habits show the current ratio of customer spending on services ranges from 2 to 7 times the amount of the product license (see Figure 2) - a real shift from the 1:1 license-to-service ratios we saw just a short time ago.

Figure 2: Ratio of Customer IT Spending

Professional services contribute pull-through of both product and additional traditional service contracts. Companies that use professional services to lead the sale can average 50 to 100 percent higher revenues from both products and services.

THREATS

There are a couple of threats to be considered. Competition for the midmarket is growing. Many ERP vendors who formerly focused on the Fortune 500 are moving down-market. Companies such as Oracle, SAP, and PeopleSoft have worked to make their applications easier to use and faster to install, thus more affordable for the midmarket. Another threat is the rising customer demand. Although this was already listed as a strength of this market, it also can be considered a competitive threat if your competitors are ahead of you in providing these services.




In summary:

RECOMMENDATIONS

The point of the above SWOT analysis is to identify strengths that can be exploited and weaknesses that should be improved upon, as well as opportunities for success and threats that need to be overcome. The following recommendations fall out of the analysis:

• As always, start with the customer. You need solid research that tells you what professional services your customers need and want, what value they place on these services, and whether they trust your company to deliver these types of services

•  In the early stages of development, decide who will deliver these services to the customer. It may or may not be the same people who deliver your traditional services.

• Define repeatable processes for your professional services so each engagement has some predictability.

• Establish some sort of "bid desk" to generate informed proposals with realistic cost estimates.

• Determine who will sell the professional services, and when. The sales process for your traditional services and/or renewals may not include contact with customers at a time they are likely to need these services.

• Train, train, and train the sales force on how to sell professional services.

The bottom line is that the buzz about professional services is real. This is not a passing fad, but rather a real and significant opportunity.