The Problem of Scale in Professional Services: Productize and Digitalize Services to Create Predicatable Revenue

The Problem of Scale in Professional Services

“If a consulting firm, say, or a law practice wants to double its revenue, it has to double its staff of consultants or attorneys. Consultancies, law firms, ad agencies, and other professional services firms struggle to nudge their gross margins above 40% as they achieve scale.”

Mohanbir Sawhney, Putting Products into Services, Harvard Business Review

Digitalisation enables service companies to grow by optimising the output of existing experienced resources instead of hiring new people. 

A 2017 McKinsey study indicates that at least one-third of the tasks in about 60% of the jobs are repetitive. This means these tasks need very little critical thinking skills or emotional intelligence to perform them. Digitalization aims to take this 30% off the hands of experienced knowledge workers and leave them with more time to spend precious billable hours on cognitive, strategic and value-adding tasks, driving organisational growth.

Create a Product Out of a Service

A product is a “brand promise at a certain service quality and level, packaged with a holistic experience”, outlines Nitin Kumar in a Forbes article titled ‘The ‘Product Vs. Services’ Conundrum’.

A good example is a digital product we recently built for a law firm in the Netherlands, which translates years of knowledge and expertise of this firm into a digital product delivering employment contract services. It supports the law firm’s primary business by streamlining custom contracts and workflows, helping them focus on higher revenue-generating consulting and litigation work. As an offshoot business, the firm sells the digitalized product to organizations that wish to self-manage their HR and employment contracts while remaining compliant. The product allows client organizations to draft contracts easily at a high level of precision and at a much lower cost than engaging experts for this service. As for the law firm, the low per-contract revenue is more than compensated by the increased volume the product handles.

Successful productizations leverage artificial intelligence, machine learning and analytics to continuously improve the service and offer high levels of efficiency beyond human capability.

Not every task is ideally suited for productizing. To bring in predictable revenue, a digital product must solve a recurring problem for its target customers for them to want to pay for it. This aspect should be given much deliberation and research when formulating a productization strategy.

Productize High Volume Low-Skill Tasks

“Any business capability that can be digitized should be productized,” says  Gartner’s Brian Prentice. “But not all digital business capabilities should be turned into revenue-generating external products”.

The point he is making is that the strategic capabilities lending to the service organization’s competitive advantage, even if digitised, should not be sold externally. The salient knowledge the service organization has built over many years in delivering highly strategic tasks should instead be used to differentiate its primary service business from the competition. The productisation should, by taking care of the prep work, support more of such high-value tasks to be performed and billed at a higher rate. 

Another reason low-volume, highly strategic tasks are not ideal for productizing is that they do not provide sufficient data on which to base automation. As Mohanbir Sawhney further points out, “For professional services companies, these opportunities simply aren’t worth the investment”. 

A clear distinction of productizable aspects in services will ensure recurrent revenue, as well as savings in time and money from productization projects. 

Sawhney shows, the ideally suited tasks for productizing are of high volume and repetitive nature, requiring little specialised skill to execute. 

Generic functions are also suitable to be included in a productized service,  these may include:

i.  Management of the state of service, eg. tracking how well contractual obligations are met or in an auditing service evaluating their clients’ compliance with rules and guidelines established by regulatory agencies

ii.  Information customers will need to make decisions, such as trend analyses and real-time information. For example, payroll productisation can provide reports such as which job contracts are coming up for renewal,  trend analyses of attrition in different jobs within a company, or use their anonymised data to provide customers with regional or industry median pay for different job roles.

iii.  Invoicing, work reports, etc.

Even if a service organization has an ideal set of tasks for automation, there has to be a sufficient number of customers for it to be productized and generate a predictable revenue stream.

Make the Business Case (Ensure There Is a Market)

A mature service organization will have years of knowledge and volumes of data that lend to digitalization.

However, it is important to carry out a market study to justify the cost and effort involved in packaging and selling a digitalized aspect of their service as a  product. The study should analyse and quantify the demand, identify competitive offerings and ensure that the market is not already crowded with similar products. 

Once the business case is justified, the service organization can set up the process and align the right people for productizing their service.

Six Critical Success Factors to Pay Attention to As You Productize

A typical digital product company builds its business around the product they develop. However, productizations are usually offshoots of service businesses whose owners are professionals with specialised vertical knowledge.  

These companies need a setup that emulates a typical product company while leveraging its vertical experience to ensure the success of the productized secondary business. 

Here are 6 factors that can help:

i. Have a dedicated product development team: Setting up a dedicated product development team consisting of business domain experts from the services company, IT experts from a development partner and pricing experts, is necessary not only to develop but also to continuously improve and align the digital productisation with the target market. 

ii) Focus on a small number of specialised services:  The narrowing of focus allows firms to repeatedly analyze similar problems. The raw experience provides the wisdom and confidence necessary to deal with issues within their domain of expertise and dive deep into research within their niche, as per How to Productize a Service, an article on taprun.com. – a blog dedicated to pricing strategies.  

The example provided in the article by Sawhney, of EXL, a company providing services in the niche of medical claims management, describes this well. Due to digitalization, and the creation of the product payment integrity tool, EXL was able to investigate and analyse overpayments due to various reasons, recognise patterns, predict the likelihood of fraud associated with certain claim types and save millions of dollars for their customers.

 Such focus will help the product gain customer confidence as a domain expert.

iii) Make deployment of the product simple: As the service company’s primary business is not selling the productized service, maintaining large teams to support deployment will not make financial or management sense. Therefore, an increased number of productizations are offered as cloud-based solutions. Customer support for these is provided by technical solutions vendors who in the best scenarios, will become stakeholders of the productized service business.

iv) Ensure people and process readiness: Sawhney shows that “Successfully developing products to embed in services requires more than just a sound process. A firm’s culture and people’s mindsets have to change”. He further explains that the “flip side to the benefits of intelligent automation is that firms will need fewer people to manage a process. Algorithms are created and improved by humans, and technology is nothing without people to guide it”. 

It is important to make the people in the primary business organization as well as the client organizations understand that the productization will leave employees with more-meaningful jobs, and companies with more-profitable business models.

v) Refine the Monetizing Model

As more and more companies consider a cloud-based deployment method for their digital products, the best pricing model in our opinion is subscription-based options.

As per Forbes article ‘Everything-As-A-Service: Why All Brands Must Consider Subscription Models’, this method alters the traditional business model, from buying when there is a need “to one where they sign up to receive that product or service regularly. The customer benefits from convenient auto-renewals and a deeper connection with the brand (which learns more and more about what they want). Meanwhile, the business generates predictable revenue and enjoys all the business benefits that come with boosting customer engagement.” 

Another frequently used monetizing model is per-transaction basis charging.  It operates on offering clients reliable, efficient results at a low per-transaction rate, and driving volume to earn revenue.

However, as per Mohanbir Sawhney, converting to per-transaction-based billing requires a paradigm shift from the conventional “billing hours”, professional service organizations are used to charging. This is because the transaction-based billing method charges a low fee for high efficiency, as opposed to the existing method’s high rate charged for senior experienced, efficient staff, providing more reliable results.

Other models “can be retainers, recurring contracts or one-time engagements, and prices can be fixed (versus time and materials in the non-productized world)”, as per Nitin Kumar.

As the product organization has the potential to sell its digital productization to other businesses and generate a new revenue stream, it is good to test the pricing model with a loyal group of customers, before going to market. Whichever monetizing model the productizing company may finally decide to use, being aware that getting the right pricing structure takes time and patience is essential.

vi) Support customers; they will support you

Like any other digital product, productized services should focus on providing excellent customer support to gain customers and produce predictable revenue. Customer support services can be outsourced to the technical partners building the product or a third party specialising in the area, with the service company closely monitoring service standards. 

Lastly, leveraging the existing customer base of the service organisation to promote the digitalised solution will support predictable revenue. Read more about these aspects here.

Productize and Digitalize Services to Overcome Linear Growth

High-end service companies can defy traditional growth models that rely on increasing headcount, by digitalizing. They can earn supplementary revenue by selling suitable productized assets if a sizable market is available.

“The world of professional services stands ready to be transformed by analytics and automation. That’s good news for services firms; they can leverage the power of embedded products to break free from the linear-growth trap”, opines Mohanbir Sawhney.

He also points out that when “Productivity rises, efficiencies increase, and nonlinear scale becomes feasible as productized services take over high-volume tasks and aid judgment-driven processes”.

References
Putting Products into Services, A revenue-growth playbook for consultants and law firms by Mohanbir Sawhney, https://hbr.org/2016/09/putting-products-into-services

Jobs lost, jobs gained: What the future of work will mean for jobs, skills, and wages, https://www.mckinsey.com/featured-insights/future-of-work/jobs-lost-jobs-gained-what-the-future-of-work-will-mean-for-jobs-skills-and-wages#part1

How to Productize a Service, https://taprun.com/productize/

Nitin Kumar, The 'Product Vs. Services' Conundrum, https://www.forbes.com/sites/forbestechcouncil/2020/10/13/the-product-vs-services-conundrum/?sh=413201d87eb6

Bernard Marr, Everything-As-A-Service: Why All Brands Must Consider Subscription Models, https://www.forbes.com/sites/bernardmarr/2022/05/12/everything-as-a-service-why-all-brands-must-consider-subscription-models/?sh=7b5213047054

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