Top 5 predictions for professional services in 2023
Guest post by John Ragsdale, the distinguished vice president of technology research for the Technology Services & Industry Association (TSIA). John’s expertise is in assisting enterprise technology firms with the selection and value realization of tools and platforms, with a constant focus on the customer experience.
As we close out 2022, enterprise technology firms are trying to figure out what to include in their strategic plans for next year to continually grow their professional services (PS) businesses. There are multiple trends in play forcing PS teams to transform, as well as economic forces that cannot be ignored. In this blog, I will look into my crystal ball and provide five predictions impacting people, processes, and technology, for professional services in 2023 and beyond.
1. Refocus on profitability and margins
TSIA’s recent Economic Sentiment Survey found that 73% of enterprise technology firms are expecting revenues to grow in 2023. However, 49% are planning cost savings through hiring freezes or potential layoffs, and 57% expect budgets to be flat or reduced. With the growth rate for PS averaging an impressive 32%, PS execs can expect their revenue number to go up for 2023, but they will need to create a plan for this revenue increase that does not include additional staff.
With flat or declining budgets and headcount, there will be more pressure than ever to maximize profitability. For PS teams, this likely will mean:
- A focus on fixed price, repeatable offers. According to TSIA’s Professional Services Benchmark Survey, 55% of PS projects are now fixed-price, repeatable offers, which allow you to capture lessons learned and best practices to create very prescriptive project plans. If properly documented, these projects can be executed by someone less experienced, and by constantly refining the plan, margins for the project should continually improve.
- Embracing all modules of your PSA system to increase project visibility and margins. When I interviewed TSIA members about their use of their PSA system, I found that most companies purchased the platform to solve a particular problem, usually resource management or forecasting, and they had never taken advantage of the full capabilities available to them. Please take a look at everything your PSA tool offers, across revenue management, resource management, project management, and project accounting, and leverage the entire platform to create more visibility into your end-to-end PS process.
- Finding new sources of revenue and introducing more offers. For companies still focusing primarily on implementation and integration projects, it is time to consider introducing new offer types that will generate additional revenue streams. In particular, this blog will discuss value-based offers, and renewable subscription services, which should be on your PS roadmap for 2023.
2. Value-based offerings
PS is amid a transformation. When asked to prioritize the charters of PS in the TSIA Professional Services Strategic Alignment Survey, “Adoption/Customer Value” achieved the top ranking, over previous top charters of “Margin” and “Revenue.” Clearly, the role of PS in implementing, integration, and customizing technology has major implications on a customer’s ability to rapidly adopt and receive value from their technology purchase.
However, according to TSIA’s Professional Services Benchmark, currently only 3% of PS revenue, on average, comes from value or outcome-based offers. For PS to truly transform to a primary focus on adoption and customer value, they need to begin creating a new catalog of offers to assist customers beyond core implementation motions. This may mean:
- Better definition of desired outcomes upfront. A TSIA R3 Poll, Expectations for Selling SaaS, found that only 28% of sales teams are required to capture the customer’s desired business outcomes as part of the sales process. Identifying this information, and recording into the account record, will help the PS team understand how to tailor the implementation to accelerate time to value.
- No more “one size fits all” implementations. With expectations for ROI varying for a single technology by company size, industry, and even geography, having very granular implementation plans specific to different outcomes, and time to value will be required.
- New value-based offers. 41% of XaaS companies have a documented methodology for developing PS offers that are intended to increase the adoption of products by existing customers. However, based on the low revenue for these offers either the catalog of services is very limited, or the approach to selling them has not been figured out.
3. More collaboration between PS and CS
According to a TSIA R3 Poll on Monetizing Customer Success (CS), 42% of CS organizations have introduced monetized offers. When asked what the strategy was for CS monetization, 71% of respondents said it was to grow revenue. However, only 21% of the companies offering monetized CS offers are tracking margins for these offers; for those that do, monetized CS offers average 25% margin, compared to an average of 33% for PS delivery margins. Clearly, CS needs to work more closely with PS on how to define, price, and deliver projects in order to maximize profitability.
For companies with monetized CS offers, the majority seem to be involving PS to some degree, as several of the most popular monetized offers are motions that PS is best positioned to deliver. 71% of companies monetizing CS offer process consulting to help companies refine core processes to take greater advantage of technology features and automation, and 68% offer services for adoption planning, and adoption optimization. With PS consultants having enormous business acumen of how companies across various segments effectively leverage technology, they are the most likely resources to deliver these projects.
If PS and CS at your company are not tightly aligned, working together on monetized offers, and defining offers that drive adoption and value, don’t wait for executives to force this conversation. Be the agent of change in increasing visibility, collaboration, and skills sharing between PS and CS.
4. Embracing renewable services subscriptions
PS subscriptions are services that are designed to be renewed, unlike traditional, transactional project-based services. A common approach is to sell customers a bundle of hours, points, vouchers, or credits, which can be applied against available services. In this way, they prepay for services that are consumed over the life of the contract, typically one year, and work with their CSM to identify appropriate services to consume.
According to a recent TSIA R3 Poll, Flexible Consumption in Service Offerings, 60% of companies who offer prepaid service credits have a “use it or lose it” policy, meaning any unused credits at the end of the contract are not carried over; 25% of companies have a limited carryover policy for a fixed period of time. CSMs and project managers need to collaborate to track consumption and take resource availability into account, and not overload consultants by trying to consume too many credits at the end of a contract period.
In a webinar last year, Moving to a Subscription Model in Professional Services, presented by Bo Di Muccio, Distinguished VP, and Dave Young, Sr. Director, from TSIA’s PS research team, 61% of the audience were either subscription “curious,” or had already taken some initial steps toward introducing subscription offers for PS, whereas 39% of the audience were either piloting some concepts or already had subscription offers available. Currently, we aren’t seeing many companies realize the significant revenue from renewable offers, with the current focus on shifting to this model, when asked to project subscription PS revenue in three years, many companies foresee this becoming a critical source for PS revenue in the future.
With a tough economic climate, companies are looking for additional sources of revenue, and clearly, PS can be seen as a center of revenue growth. However, this will require adding new offers that focus on adoption and customer value and introducing new service consumption paradigms, such as service subscriptions. If this paradigm is not yet established in your company, 2023 is the year to start. As a part of this process, be sure to evaluate the required technology to allow resource and project management for this new breed of projects, and the billing capabilities required for customers to purchase and consume services via points or credits. I suspect that many companies’ professional services automation (PSA) and ERP/billing systems will need a significant overhaul, or replacement, to meet these new and more flexible requirements.
5. Coming to terms with the gig economy
A TSIA study in late 2021 revealed that younger workers have very different attitudes about job tenure compared to previous generations. While 64% of Baby Boomers say they plan to stay with their current company indefinitely, 25% of Gen Z say they only plan to stay for one to three years, and almost half, 46%, say their expected tenure is three to five years. This translates into increased costs for enterprises that must onboard new talent each time and invest capital in their training and development.
There is also increasing evidence that younger workers prefer the variety of work that the gig economy is providing. A study from the Workforce Institute notes that 53% of Gen Z said they would pass up a traditional job for full-time gig work, with 55% citing flexible schedules and 53% noting greater independence (e.g. being their own boss) as important considerations.
With tight budgets and headcount freezes, PS needs to become more agile with contract workers, which can be used to fill the skill gaps in projects, without the overhead of hiring consultants. With this in mind, I would recommend PS teams consider two approaches to better enable success for contract workers:
- Create prescriptive project plans to eliminate long training and onboarding for contractors. As mentioned earlier, these well-defined project plans for fixed-price, repeatable projects, can not only allow you to improve margins on internal projects, they can also help your consultants be more successful with less training and oversight.
- Leverage PSA technology to better track contract workers, or 3rd party services firms, to ensure their projects are successful. As discussed on a recent TSIA Technology Summit, Bringing Visibility to the Partner Network for Service Sales and Delivery, extending your internal PSA system to your contractors and implementation partners will not only provide better insight for you into these projects, it also allows them to access your project plans and collaboration capabilities to improve efficiency and help them be successful.
It appears that 2023 is going to be a challenging year in many ways. However, the economic pressures we are experiencing can also be a driving force to transform PS at a more rapid pace. Overarching trends such as transitioning to a charter of adoption, introducing value-based offers, partnering with CS on monetization, and enabling renewable, subscription services, are all necessary steps for technology companies to be successful in the subscription economy. Though these changes will undoubtedly create some change management issues to people, processes, technology, and culture, I think a year from now we will all see the results materializing in stronger revenue, profits, and overall corporate stability.