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Many product companies are moving to servitization business models. Rolls Royce sells aircraft engines by the hour “as a service.” HP charges for printers by the copy. Citi Bike sells local transportation by the minute. Software companies sell cloud solutions on a subscription basis and pay-per-use models.
At the same time, professional services firms are moving to digitize solutions, packaging digital capabilities, data or assets together with people-based services – “everything-as-a-service” or XaaS.
Firms want to capture knowledge, deliver it digitally in a way that complements their professional services, and charge clients based on their usage or even on business outcomes. These solutions can combine software, AI, data, analytics, hosting, support and traditional consulting services.
What’s driving XaaS in professional services?
Professional services firms have a lot of reasons for moving to these new delivery and revenue models, including:- Meeting client demands: Clients want to pay for outcomes rather than time spent
- Expanding offerings: Digital products and holistic solutions increase stickiness, share of spend, and complement people-based services
- High-margin growth: Enable non-linear, “leave-behind” revenue streams that continue to generate revenue after the project is completed
- Increasing market valuation: Present to the market as a high-valuation technology company with large growth opportunities and predictable, repeatable revenue streams.
The bumpy road to digitization and XaaS
Many firms already offer specialized digital consulting practices and use digital tools, data and analytics to deliver traditional project-based services. Some also resell software with hosting and support services. But few firms offer standalone digital solutions or outcome-based revenue models in a strategic way.
More often, they respond opportunistically to client requests for solutions and deliver the best they can. The result is a library with hundreds of one-off products, used more often as internal tools instead of packaged, re-sellable solutions.
There’s also little in the way of portfolio management and R&D to consolidate requirements and engineer a suite that can be sold to multiple clients.
Traditional firms are threatened by technology disruptors that take a digital-first approach. Two disruptors in the legal space are Littler CaseSmart and LegalZoom. In the tax preparation area, TurboTax was an early entrant, soon followed by a digital solution from traditional firm H&R Block.
These companies disrupt client pricing expectations and even traditional partnership pyramid models. Repetitive work that was used as on-the-job training for entry-level associates is now being done by technology.
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Professional services & Xaas: Factors to weigh
The benefits of moving to new digital delivery models and XaaS are clear, so why aren’t more firms doing it?
There are multiple factors to consider before making the shift:Culture: Is the management team willing to take on more risk and longer investment cycles (especially if partner-owned)? Can salespeople sell products and solution packages as well as consulting services? How do you scale up new business models without risk to existing successful business?
Organization: Should you build your own R&D, product sales, and support organizations? Or should you acquire a technology firm, spin them off, and resell their products?
Processes and systems: How do you optimize the solution mix and set prices across solutions to drive your strategies? How do you automate the fulfillment of subscription, outcome-based and contract-based delivery models? How do you measure business performance across services and products, including the ROI on development or asset costs?
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Getting off the deck: Digital delivery options
Building digital solutions requires an R&D organization. This should be cross pollinated with service experts who know your clients, but dedicated to R&D, and not pulled off for the next priority project.
Identify opportunities where you can automate your current delivery processes, especially those that are labor intensive and repeatable. Start by building digital accelerators that your consultants can use to deliver traditional client projects more efficiently and which could allow you to offer higher margin, fixed-fee services.
If these solutions are highly repeatable, package them as standalone offerings. If you can collect good data from these processes, monetize it through subscription and usage fees and offer analytical solutions around it.
Finally, if you can reliably link your services to outcomes, consider outcome-based fee models. You can also offer premium support services as an ongoing, contract-based revenue stream.
Firms might also consider acquiring digital, analytics and software companies and operating them as standalone entities while preserving their engineering and product cultures.
Another option is pursuing joint venture opportunities with digital firms. Let the JV develop innovative products while you continue to provide professional services. Resell the digital products and assembled into a complete solution.
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How to get started with Xaas
Start by prototyping new business processes and enabling enterprise solutions in self-contained areas of the company. Consider end-to-end business processes and supporting capabilities such as:
- Product and solution development, including pricing and bundling rules
- Guardrails for sales to quote and bundle solutions consistent with your strategy
- Process and system capabilities to fulfill your new services beyond project delivery, such as XaaS subscription, usages, outcomes and support contracts and monitoring
- Make sure your revenue recognition and billing can handle new products and solution bundles
- Manage performance consistently across these products including allocation of the R&D investment. Optimize pricing and packaging to continue to drive business objectives.
- Establish a portfolio management process to evaluate product investment decisions on an ongoing basis
Delivering digital and outcome-based services is a topic everyone talks about, but few are doing strategically. There will be significant growth and margin opportunities for the first movers who can figure this out at scale. It’s a multi-dimensional challenge, but there are steps you can take to get started today.
