Today’s discussion focuses on one topic that consultants and business managers often ask: how to sell services in enterprise software, and how to price them? Before we go into pricing, let’s start reviewing the different types of offerings that fall under the services category.
Gross margin considerations
Many enterprise software providers set a goal to be in high margin businesses. Software margins for SaaS are generally well into the 70% to 80% gross margin. On the other hand, services tend to be 40% to 50% gross margin. This means that by pursuing both software and service deals equally, significant margin dilution could result. For that reason, many executive teams decide to limit their involvement in the services market, leaving it to partners. By doing this, they retain the rich software margins and avoid the dilutive effect.
When a software company is somewhat new in the marketplace, it can be difficult to recruit and train high-quality service partners. As a result, it often has to provide the services to the customer, along with the on-premise or SaaS offering, to ensure the solution is properly delivered.
As the software business grows, it can become beneficial to not engage in the services business directly, particularly for consulting and training. The first reason is the margin dilution to the P&L, as outlined in the previous section. An equally meaningful motive is the avoidance of competition with the ecosystem. The more a software company develops a consulting practice, the more it is bound to compete with consulting companies, its ecosystem. When this occurs, the system integrators, developer shops, training organizations and other service providers see the software vendor as a foe, not a friend. On the other hand, by keeping these in-house services to a minimum, the ecosystem can capture this part of the business and partner more easily through a co-selling model.
Types of services and who delivers them
Support services serve the purpose of ensuring customers can report bugs, problems and get help using the software. Consequently, these teams are often part of the Product organization inside a company. If the product is reliable and easy to use, Support has little work to do. But if it’s the opposite, then Support incurs a high load. Combining the product managers with those who do the front line support can make sense, as each relies on the other to understand how the product is used, where it’s working, and where it’s not working.
Support is broken down into 3 tiers. Level 1 is the first agent answering the call. These agents are generalists, and often not very technical. They help field basic issues and route more complex inquiries to the right teams in Level 2. Level 2 Support is more technical, sometimes even specialized. Level 3 teams are those who are able to go into software code and apply product fixes or make product changes. Sometimes, Level 3 Support is the Product Management team itself.
Outsourcing support services is uncommon, although it happens. Because the feedback loop and accountability involves the core product, companies tend to keep this function in-house.
Enterprise software tends to involve several steps once purchased, that customers may not be able to perform on their own: installing the software, setting it up, training their employees, customizing the software (creating dashboard, reports, workflows, apps), and so on. Consulting firms, also called System Integrators (SI), specialize in these tasks. Some of the largest integrators include Accenture, Deloitte, PwC, IBM Services, Tata Consulting. They tend to co-sell with software sales teams. The software sales team carries the product quota, the integrator carries the services component.
While system integrators go across the spectrum of services, including training, some companies specialize in this segment of the market. Customers can get basic training from their vendors in the form of documentation, videos, tutorials, learning and certification paths, mostly for free as these are online tools. Software vendors typically only charge for the certification exams, which can be produced in-house or outsourced to a learning and certification platform vendor on behalf of the software company.
Partners delivering training complement this with classes held in locations close to the end customers, sometimes onsite at the customer’s offices.
The role of Customer Success, as a business function within a software company, is recent. It used to be that Sales would sell the product, Support would help customers with their problems somewhat reactively, and marketing would do magic for customers to want to buy more. In the world of 5 to 10 big tech companies dominating the market and selling perpetual licenses, this used to be enough. Enterprise software has moved to a rental model, the subscription model. Customers commit annually, for multiple years, and they have more power in this model to renew, or not renew. Hence comes Customer Success.
When software companies sell to large clients, they find a way to dedicate a team called Customer Success. This team is tasked to make sure the customer successfully installs the product, configures it, and that the various intended users inside the customer’s organization actually use the product. If the customer doesn’t use the product, the software vendor now has the analytics to see it. Thank you, SaaS model. This is a warning sign. If the product doesn’t get used, renewing the contract is going to be difficult. So the customer success team, unlike support, has a proactive approach in that sense. It will reach out to the right people at the customer’s organization so that things change. Customer Success also helps with escalations inside the host software company, if issues are not being resolved, or if a partner does not do a good job.
Some customers are more technical than others. Certain customers have internal teams of developers, or sales operations, who can take care of the many aspects of running enterprise software. For SaaS applications, this need is fairly simple to cover, to the extent the customer only uses the application in their standard state. But for projects that involve coding, moving data, managing databases and custom applications, sometimes the ongoing operations to keep these customizations up to date, secure and relevant requires a third party. This is the Managed Service Provider. They will manage the databases for you, the apps for you, on an ongoing basis.
Also called Advisory Services, these programs are sales-centric. This is especially relevant for large potential deals, where executives of a large company need to be educated and convinced that a software vendor and its products are the way to go. The sales team will arrange a week with the customer’s exec team, and a set of presenters matching their interests and concerns, and do their best to Wow them.
This is a service, in the sense that there is often money changing hands. Customers of that size, when committing their senior executives, often participate financially in these programs. There is no product being sold yet, though. Just people meetings.
Does subcontracting services make sense for a software vendor?
Software vendors, when deciding not to engage in mainstream consulting services for the reasons outlined above, will often co-sell with consulting partners. In limited cases, they will hire the partner as a subcontractor and bill the customer directly, acting as the “prime”. The advantage to the customer is that they deal with the software vendor. The disadvantage to the software is that if the subcontractor does not deliver or makes lots of mistakes, the customer will complain to the software vendor. For that reason, software vendors tend to avoid priming consulting deals when they can avoid it. This limits their risk of liability and brand equity.
To be as neutral as possible, the software vendor will likely recommend 3 to 5 potential partners, or point the customer to their partner listing. This also ensures the customer makes their decision independently, and can’t argue, in case of an issue that “the software vendor told me to use these guys”. Keeping a neutral role, the software company can focus on ensuring its partners are trained, qualified, and surface it to the customer base.
How do software companies ensure services delivered by partners meet customers expectations
The next question, therefore, is how software companies can ensure that their consultants deliver a quality job to customers. There are two complementary methods to achieve that goal.
The first method is to run surveys with customers every time a partner completes a consulting engagement involving their software product. “Did this partner do a good job?”. By asking customers to rate on a consistent scale how happy they were with a particular partner for a particular product, software companies can collect hard data on which partners perform to their customers’ satisfaction.
The second method is to have a clear path of training and certification for specific products or types of work. Customers can see, alongside the survey ratings, how many certified consultants they have in a particular technology or product.
Pricing and bundling for enterprise software support
The pricing of support varies by the type of product, but there are a few driving forces that determine this. If the company aims for price leadership or competes in a price sensitive market, support is often not bundled into the base product. A basic support that is free often comes in the form of discussion forums and a knowledge base, an online self-service tool. This allows the products to be sold at the lowest cost, and paid support to be sold separately to customers who want to purchase it.
In higher margin environments, basic support with email ticketing can be bundled into the subscription for the software. This especially makes sense if the software is mature: the product has proven that it works, so the volume of support tickets will likely not be a high cost to the vendor. Premium, phone-based support, can be upsold on top.
Pricing for enterprise software consulting
When software companies focus on software, they sometimes keep a small consulting team for special projects and tend to charge high rates for these engagements. Partners take the bulk of the consulting revenue opportunity and price their service based on reputation, competency, project complexity, and the location of their consultants.
Artificial intelligence: the future of services
As we evolve into more automation, many of the services have already been automated: the knowledge base, the peer-to-peer forum support, and so on. At the time of this writing, Amazon is automating call centers with Alexa voice recognition and rich dialogs. This helps much of the level 1 support handling, and the intelligent routing to the correct agent. We can expect these AI services to continue growing, as machines can do more of the people’s job, and offer more value to the customer in certain situations.
But services performed by humans will remain. Humans will add more value. New jobs will be created. The world will continue moving forward.