Sirens' song: Professional services should be a high-margin component of a product company's portfolio.
Boulder ahead: Many product companies are experiencing lower than expected margins from their professional services business. Gross margins for professional service business units have been running at 1215%, with net operating profits of 0. (Source: "Should Professional Services Be in Your Company's Services Portfolio?" Shera Mikelson, Hahn Consulting.)
Some of the best and brightest product companies have struggled in the voyage of profitably growing a services organization. IBM is constantly used as the poster child for success, a model for how a product company can move upstream and transition itself into a true service and solution provider. But how many companies have the deep pockets of IBM? In these days of open systems, how many companies have a locked-in install base that can carry them through the painful and unprofitable transition that IBM went through? And how many other examples of success have you read about? How long is the list of product companies that have actually developed a successful and profitable service organization that offers more than basic support services? The number of articles describing product companies that want to offer more complex services is endless. The number of articles documenting favorable results is almost nonexistent.
What causes product companies to struggle on this voyage? What causes so many of them to create consulting organizations that operate at low margins? Through my direct experience and research, I believe there are three overriding factors that prevent product companies from creating successful and profitable internal consulting organizations:
Lack of executive alignment
Mismatched business models