Phase 1: Implementation Services
A product company starts with basic product support services. Granted, many support services can be very sophisticated, but they are always always always focused on supporting the core products of the company. Implementation services are the first step beyond this comfort zone. As mentioned earlier, product companies are often pulled into this phase of service offerings. Customers need help implementing complex products. Customers don't want to manage multiple vendors to implement one solution. Customers want someone on the hook!
The value proposition that the product company makes when offering implementation services is relatively straightforward: product expertise and risk reduction.
Who knows the company's products better than company consultants? Who better to help you implement the product? "And if you're tired of juggling all of these various product relationships, we can take the point position (for a price, of course)."
In this initial phase, revenue is king. Without revenue, it becomes very difficult for the fledgling services organization to justify itself and acquire much-needed resources. Bookings and revenue forecasts are watched with great anticipation. If the trends were not up and to the right, then why would the product company be compelled to continue the experiment?
There are two key skills required to navigate through this phase successfully. First and foremost, your services organization will require highly skilled project managers. These project managers are crucial to customer success and satisfaction. These employees will be managing the multiple subcontractors you have now agreed to manage for the customer. If your project managers are weak, your projects are doomed.
The next critical skill is required to drive top-line revenue growth. You need competent service sales reps. Not product reps who think they might sell some services in their spare time, but full-time service sales reps who drive bookings for your new business.
Required Operational Infrastructure
As mentioned, your operational infrastructure addresses three levels: staff level, project level, and business level. During this first phase, some basic business-level infrastructure needs to be put in place.
Required Operational Reporting
From a reporting perspective, basic business-level financial reports need to be implemented. If they're not in place, it becomes impossible to manage the business.
Required Operational Processes
From the process perspective, it's crucial to establish business-level frameworks for dealing with partners and customers. This includes partner agreements frameworks and customer contract templates.
Almost by definition, implementation services involve assisting in the implementation of your product with other surrounding products to create a business solution. This reality drives a revenue mix weighted heavily toward pass-through revenue. Most of your direct revenue will come from the billable hours of your project managers. Bottom line, you should expect a revenue mix of 30/70, with 70% of your revenue to be pass-through revenue.
Revenue Growth Rate
During this phase, top-line revenue can be grown at a phenomenal rate. Why? Because of the target mix previously discussed. You're adding revenue by reselling the products and services of others. You're not constrained by your own limited delivery capabilities. Based on this reality, it's not unreasonable to target revenue growth rates of 100200%.
Target Gross Margin
With all upside comes downside. The upside of a 30/70 revenue mix is that you can grow revenue aggressively. The downside is the impact on your gross margin. Due to the poor revenue mix, you should only expect gross margins around 4%. This seems impossible, but it's true. The math is very simple; look at the calculations shown in Figure 2.
Figure 2 Revenue mix for implementation services.
Target Operating Profit
This is the part that stings. When product companies first engage in implementation services, they're lured into a false sense of success. As customers sign large dollar deals, the product company is enchanted by the swell to the top line. But to collect service revenue, you must deliver the services. This phase almost always requires large payments to your subcontractors. You're also spending money to ramp up your sales and delivery staff, and you need to invest in some basic infrastructure. Putting this all together results in operating profits ranging from 20% to 10%.
So there you have the implementation services phase in all its glory. Most product companies will be highly motivated to move through this phase into a more profitable one.