Phase 2: Integration Services
By offering implementation services, you stepped up to the plate and offered to manage multiple vendors to make your customer successful. Your customer is thankful. But there's a fly in the ointment. Even with the capabilities of your product and the products from other companies, the customer's problem is not being totally addressed. Crucial pieces of glue are missing. Whose problem is it? Once again, to close the deal and guarantee customer satisfaction, the product company is motivated to fix this issue. The key is to make money in the process. Welcome to the integration services phase.
The value proposition that the product company makes when offering integration services is slightly modified from the value proposition used when offering implementation services. Beyond product expertise and risk reduction, the product company is now willing to provide the specialized technical expertise required to glue together disparate products. The harder the technical expertise is to find, the greater the value to the customer.
In this phase, revenue remains important. In fact, in all four phases, revenue remains a focal point. But as the professional services organization matures into the integration services business, customer references become crucial. Customers need to hear other customers validating your capabilities. Specifically, industry references are key. Customers need to hear from like customers. In his marketing how-to book, Inside the Tornado: Marketing Strategies from Silicon Valley's Cutting Edge (HarperCollins, 1999), Geoffrey A. Moore describes the strategy that high-tech firms need to deploy to develop emerging customer markets. He uses the analogy of a set of bowling pins to describe how a company must leverage customer references to drive adoption of a new solution:
The purpose of the bowling pin model is to approach niche market expansion in as leveraged a way as possible, to bowl toward [a market] tornado...[Customers] find it much easier to buy in if vendors can supply references from an "adjacent niche," one within which it already has established word-of-mouth relationships. If you go after niches at random, driven solely by sales opportunity, there is no such leverage at all.
In essence, when you make one customer successful, you're "knocking over" that pin. As that customer pin falls, it bumps into another target customer pin (they attend the same industry shows, belong to the same industry professional societies, and so on). The second customer can be from the same market niche or one closely related. The important point is that you're acquiring references that are relevant to future target customers.
Integration services still require highly skilled project managers. These project managers remain the key to profitable projects and satisfied customers. Assuming that you've already invested effectively in service sales reps, the next skill to invest in is technical consultants. These are the folks who create the glue that's required to complete your solutions.
Required Operational Infrastructure
Required Operational Reporting
From a reporting perspective, the project level of your business becomes much more important. Are your projects being delivered on time? On budget? To get this data, you need to implement some type of project reporting system.
Required Operational Processes
From the process perspective, you also need to focus at the project level. You need consistent project life cycle processes that are used throughout your geographies. By implementing this process, you create a common language for your delivery teams. This is an investment that will return great dividends as you focus on leveraging knowledge across all geographies (repeatability).
By adding technical expertise to your value proposition, and by hiring more technical consultants to deliver that expertise, you increase your capability to collect direct revenue. Thus your revenue mix improves. A target revenue mix of 40/60 is very reasonable in this phase.
Revenue Growth Rate
Your revenue mix is still heavily oriented toward pass-through revenue. This means that you still have the ability to rapidly grow your top-line revenue. Revenue growth rates from 50100% are achievable.
Target Gross Margin
Though your top-line revenue can grow aggressively, your gross margins improve at a slower rate. Gross margins of 11% or better should be very acceptable in this phase.
Target Operating Profit
The sting still remains. While integration services involve better margins, you're still building your business. You're still hiring new consultants and ramping up their billable utilization rates. Infrastructure investments need to be made. Your executive management team should expect operating profits ranging from 12% to 8%.
Keep in mind that we're articulating a four-year growth plan for a professional services organization that wants to reach the phase of productized services. Many product-centric service organizations may choose to settle themselves into the integration services business. If this is the strategy, executive management should expect the revenue mix to continue to improve, with more and more business being delivered by the company's technical consultants. As this occurs, gross margins and operating profits will improve. World-class gross margins for this business would be in the order of 3550%. The key is to acquire and maintain superior technical talent and keep those folks off the bench.