Productization of Services Needs a Deeper Understanding of the Business
Professional services companies like consulting and law firms are constantly challenged on how to scale their businesses. Scaling professional services boils down to adding headcount; and depending on the nature of services, margins more or less cap out at 40-45%. This is assuming that a leverage model of sorts is used - e.g., loading up junior resources to do the grind and so on. Although a 40% margin is not unattractive, and many businesses such as, routine engineering, groceries or even construction run on lower margin, given the volatility and lumpiness of professional services businesses; it poses ongoing challenges. Firms try to find a way to either increase the deal size or as many financial services firms do - add on asset management which decouples the revenue from the hours spent. Protecting margins become important as it signifies growth, ensures returns match risks, and maintains a position to attract top talent. Hence, “productization” of services i.e., to move service components into standard products, is a serious consideration. But what has to happen for it to work?
Here are a few considerations:
1) What artifacts of the project are common and what are unique?
It is important to separate the common from the unique. Common means tasks across multiple clients that are more or less similar if not the same. These can be certain models, frameworks, approaches, and analyses. If these could be modularized and deployed in multiple projects without much rework, the more effective the overall delivery approach can be. This works to the firm's economic advantage when there is large scale of projects. Modules once developed can be deployed without much incremental effort in another project. Most services firms don’t build everything from scratch. They bring in their IP. If these IP can are delivery grade artifacts, then there is a room for accelerating the deployment. Productization is not just about the modularization, it is also about setting up a consistent way of go to market supported by pricing mechanisms that secures a target margin level. This must be done at the project level as well as a roll up into the firm level margins. Often times, firm struggle to establish the processes and business policies on how to set the objectives, measures, and results to make it a smooth operation.
2) What are factors that provide competitive edge in the market?
The professional services firm wins its business for specific value they create from their services. Are these winning factors related to the customized services that are provided or the outcomes from specific artifacts and IP that they bring. If the value of the typical engagements are highly dependent on the personalized services that are specific to every client situation, then shifting to a standardized offering can hurt competitiveness. It is critical to assess from their client why they hire the firm’s services. Does the client care about the customized and unique nature of the offerings? If a particular firm can isolate and bundle certain features into the common and can “productize” them, then does it lose its competitive edge? What happens if other firm copies? Usually it is a combination of both which makes it harder to isolate accurately the two drivers. Despite close proximity to clients, there is often a disconnect in understanding of what the client really values in the first place. It is necessary to seek this clarity to inform the course of productization.
3) Are the services for the product or services for the person?
When we look at UPS or Fedex we can call it a package delivery service. A hair dresser styling someone’s hair is also a service. But it is not hard to see and distinguish that they are not the same kind of service. A package delivery does not work on the customer directly nor changing his/her condition as a hair dresser would. A Uber service is also a transportation service offered directly to change the state of the customer. But how much of it is just a delivery versus the personalized offer depends on what the customer is seeking. If I need a drop from A to B versus the level of personalization from the driver the customer is expecting. Ubereats however, is transporting food and not really changing the state of the customer. These two are two different businesses within the services and indeed the same company. With a service that is acting on a person, there is a scope for personalization. Service provides can strive to learn more about what the customers are seeking and can the impact on their state from the service and the premium placed on it. Customers would likely vary quite a bit and that will drive the premium placed on those services.
How does it apply to consulting and similar firms. Too often companies get wrapped up in debates on strategy, implementation, and execution. Generic truisms float around, such as “you cannot productize strategy work.” This is perhaps true but that's not because a strategy engagement is all unique in all aspects. What is critical is the work that impacts the decision the client is making, thus impacting the person’s state. If the client finds that the services rendered are generic or based on common or best practices, when the expectation is on the fundamental issues of the client, then there is a disconnect. Many consulting engagements find themselves in this pickle when they dont apply the first principles and push the tried and tested solution too far. Or they apply these short cuts in delivery once they undersold the project and somehow have to reduce work to protect margins. We hear people saying - "hammer looking for a nail". Services that work on the products - in contrast, must think hard for productization. For instance, system integration of a software or consulting on installation of a substation, generic market research, and even managing a large program must be looked carefully for productization. Like the transportation business, it is delivering a product to the end customer space and not directly impacting his or her state at that point.
The distinction between product and services have bothered businesses for a long time. Even Adam Smith wrote about goods and services as well commodities when he mentioned the cost value of labor as the determining factor of what’s on offer. After Smith, Karl Marx had its own ideas of value of labor and economists have over centuries developed long standing theories of marginal cost and value to determine the value of an offering. As more software products are seeking XaaS (Something as a service) based on pay per use, and services are looking to productize to command higher margins, it is clear that discussion on productization of services and vice versa will remain a regular feature. Dealing with these possibilities will require a deeper understanding what the services are how they are perceived by the customers. Firms need to think deeper and arrange their business operations including their measures and metrics accordingly.
© 2021 by Greenelectrons Consulting, LLC.