Many professional services firms have one or more of the following growth strategies:
Product profit margins are closer to 70%, 80% or even 90%, versus an industry standard of 40% for customized services. Subscription-based products have fantastic revenue visibility. This is why “as-a-service” companies or those with “off-the-shelf” products have higher valuations than traditional professional services firms.
A “productization” strategy can be right solution for your company's growth. But, none of the strategies are easy.
These strategies require a different set of skills, business processes and investments. So, if you want to do these well, where should you start?
What “product” means in the context of professional services firms.
Let’s take a step back and first clearly define what we are talking about when we talk about “products” versus “services.” "Product" refers to the classic term for a scalable, often tech-enabled, tool or program that can be packaged and sold. Just like a tube of toothpaste that you might buy at a store, a knowledge-based product has a name, a pre-defined set of services and benefits, a pre-defined process for delivering those benefits, and a set price.
Here’s an example from a recent client of ours that’ll show you what I mean.
A consulting firm built a database and data analysis methodology they use as part of their consulting engagements. But, if that data analysis is sold as part of highly customized consulting engagements only, the firm can only grow revenue as fast as it can add and train staff (especially if it wants to maintain the quality of service it is known for in the industry).
The firm realized it could grow its revenue and improve its profit margin by offering that database and data analysis as a “product” for companies to subscribe to and access through a self-service portal.
The firm converted a component of its customized service offering (the database and data analysis methodology) into a product that could be sold in addition to its less scalable, customized service. The firm developed the product using an approach that helped it grow revenue by attracting new customer segments and grow profit margins, while simultaneously not putting its existing consulting services business at risk. That’s the sweet spot.
Approaches to “productizing”
In the scenario above the firm's product developed from something it had already established as part of its service offerings. Finding the right product often comes through a process of discovery and scoping to uncover customer needs, see the gaps in the market and fill them with something your firm already does well. There are two popular approaches:
1) Automate existing services
In Putting Products into Services, Mohanbir Sawhney, discusses how some professional services firms develop marketable products by looking for the “…untapped potential to automate the services they are already providing successfully.”
Sawhney provides an example of an analytics company that reviewed medical claims for fraud, waste, and abuse. Years ago, this was done manually through the physical review of claims for duplicate services, miscoding, or other indicators of inappropriate billing. Over time, the company observed patterns in questionable claims. These patterns were robust enough that the company built an algorithm to detect and flag potential fraud, waste, and abuse for further review.
“ Tasks that meet two criteria – they’re performed frequently and they require little sophistication – are the low-hanging fruit for productization.”
Worth noting is that that algorithm did not eliminate the human-expertise needed to examine claims thoroughly. Instead, it expedited it thereby allowing the company to significantly increase the number of claims reviewed, reduce the overall cost of the reviewing process, and save even more money for its clients.
2) Start with the customer need
Another approach to product development starts with finding “…poorly performed ‘jobs’ in customers’ lives-and then design[ing] products, experiences, and processes around those jobs” as discussed by Clayton Christiansen in Jobs to be Done.
We refer to this as finding your customers’ most urgent and expensive problem.
During the development stage, we employ a proprietary, proven approach for helping companies identify, develop, and introduce products. We find products that solve urgent and expensive customer problems while also leveraging our clients' existing business assets and new advancements in technology and analytics.
Watch this space
This is the first article in a series of articles aimed at helping professional service firms better understand what it takes to develop and manage scalable products. In the next article I’ll show you how to make sure your new products don’t cannibalize your services. As I mentioned briefly above in the consulting firm example, the ideal, yet tricky, situation is finding a product that expands your reach without eating into your current service offerings. Stay tuned for more!
In the meantime, don’t hesitate to reach out if you want to learn more.
Sawhney, M. S. (2016). Putting products into services. Harvard Business Review, 94(9) 82. (read it here)
Christensen, C. M., Hall, T., Dillon, K., & Duncan, D. S. (2016). Know your customers'" jobs to be done." Harvard Business Review, 94(9), 14. (read here)
Such a small, powerful, and, sometimes, frightening word. It's a word most of us hate to hear and that we don't say enough. “No," however, can be our sanity and productivity savior in our personal and professional lives when used well.
In our businesses, “No” can free up resources to pursue longer-term growth. Requests for product customization (a.k.a. one-off-work), for example, is a significant resource drain for product development teams. In fact, reducing custom development requests is the largest challenge for companies that are migrating from customized solutions to more standardized products.
Customization is often promised by well-meaning sales or account management teams that don’t fully understand a more scalable product strategy. However, if your development team is spending all of its time on custom requests, it will never have the time to make your scalable products successful.
“Simplicity boils down to two steps:
Identify the essential. Eliminate the rest.”
– Leo Babauta, Zen Habits
That leaves a lot of CEOs asking: “What can I do to reduce the amount of customized work my product development team is doing?”
I’d argue that the smartest strategy would be to correctly identify customer needs before developing new products (read our COO’s blog about how to do this), and then deliver on what gives 80% of your customers, 80% of what they need. But even when we’ve identified the product features that meet the largest customer need, we still might find ourselves with customization requests, again, typically coming from well-meaning staff who do not embrace the new scalable product strategy.
One of our clients has solved the problem of customized development requests, and they did so in less than nine months. Here’s their story.
Case Study: Reducing Customization
After decades of success selling services that were often heavily customized, our client decided they needed to build more scalable, technology-based products to effectively compete in a changing market. They did not have new investment dollars to fund building more scalable products, so they diverted their existing product development teams away from customized work toward building the more scalable products.
The shift started, first, with the CEO and the Head of Sales, announcing the strategy change at the annual sales kick-off. Knowing that they could not flip a switch and completely stop custom work for clients, they also created a way for the sales and account management team to request an exception on behalf of a client. This came in the form of a “help desk ticket” that was first reviewed by the product team and ultimately decided upon by the Head of Sales and the CEO, if necessary.
When completing this customized work request ticket, the submitter had to outline a super simple business case:
Once our client started implementing this process, many requests that may have been fulfilled before were automatically dismissed because of a lack of a positive ROI. It’s a lot easier to assess the value of a customization when it is spelled out in front of you in black and white.
The big help, especially for sales team engagement, was that it wasn’t the product development team saying, "no,” rather it was the leadership team, including the Head of Sales, saying “no.”
Additionally, the executive team and sales leadership could turn to the salesperson and say, “go look for something more profitable.” Even if the immediate request was denied, the door was open for a viable solution.
Our client started with a goal of no more than 25% of total product development teams’ effort being spent on client custom projects. In January of this year, they were at about 40%. In the last three months, the average was about 15-20%. That is a 50% decline!
Saying "no" to clients isn't always easy, which is why putting a process together to build the case for "no" is essential. We like our client's strategy to reduce customization because it allows for thoughtful consideration of the impact on the company's scalability and revenue goals.
What other strategies have you tried to reduce custom development requests? And how successful would you say they were? What do you think of this approach?