As our name might imply, we love bootstrappers. Services is a great way to bootstrap any company - especially a software company. Providing outsourced development helps us fund the development of our own products while honing our skills as developers, making great contacts, and learning valuable business skills. And long term, providing services that wrap around the product we provide is a great way to bring in revenue, diversify revenue sources, and help us brand ourselves as experts in the field. But as we grow we need more focus on products and that can make service delivery a difficult proposition.
Software companies often need to focus on what we’re good at: making software. But we often finding ourselves building a services team and potentially competing with some of our own customers. We want the revenue, but it’s hard to make services revenue balanced monthly recurring revenue. Per GAAP rules we need to accrue professional services revenue at the time services are delivered. This makes our pretty chart of the increase in SaaS revenue difficult to project properly and often means an asterisk in our business plan when we are showing investors and board members EBITDA over time.
Further, the time we spend in services takes us away from the core mission - and ends up often becoming a crutch: we sell services instead of having a sharp focus on building better onboarding experiences. Still though, services revenue is a great way to bring in cash throughout the lifecycle of our companies.
Outsource Everything, Right?!?!
We used to stand up large clusters to host web servers. That practice has largely moved to visualized hosting environments, like Amazon, Google, and Microsoft. We used to host our own servers for files, business tools, and customer relationship management (CRM) tools. But these days, we use SaaS tools for those services. So in an age where we take old concepts and slap “as a Service” on them, as we grow and need focus, many software companies hire other organizations to act as our professional services arm, rather than building a large team of road warriors ourselves. This allows us to stay focused on our core business, like building software.
But we bootstrapped the company with services, right? For some, the answer is definitely a yes. The right time to make a deliberate decision about what to do with each line of business (e.g. software and services) is when the software business can pay the bills on its own. We have a finite amount of time and resources. Dealing with the logistics and management of a Professional Services department will start to compete with the time we spend in our core business. When building a new company or trying to react to hyper growth, if we aren’t intentional about where we spend our time, we won’t be able to perform at the level we need to for anything.
Services Can Be Necessary
What we choose to do with services is impacted by what our services delivery is for. Products that require services here and there may require us to have a services team. If we bundle services for free, we’re going to want to treat that as a cost of goods sold and try to keep services delivery as a soft cost. Services as a product itself can often be outsourced though. This provides us with a low-risk way of delivering services while still capturing revenue. Services could also be delivered by a third party simply with a referral if capturing that revenue isn’t a concern, which is often when we were doing services simply to earn the funds to build our product and the customers that used those services aren’t in the market we serve with our core products.
Choosing to move services to another company, whether branded as our own or simply referrals requires us to reset the expectations with customers who might rely on us. Before doing so, we’ll want to find a vendor with pricing that provides us with the margin to make the effort worthwhile or if we’re simply handing them a referral, who we trust will do a good job for the customers we care about. But there are a few questions we should ask vendors as we begin outsourcing our services:
Margin: How much money are we talking about here? If we are talking about 3-5 points then there’s no great reason to embark on a journey like this, unless we want to streamline the sales process for the core product - or services are necessary but billable.
Scoping: Make sure to work out how scoping will happen if a customer needs something that isn't part of a standard services catalog and a mechanism for the outsourcer to accept the scope of work generated.
Lateral Support: Customers expect mastery when they pay the vendor directly, so make sure to work out escalated support to the third-party as well as routine training.
Discounts: Pre-define how discounts will be applied when sales teams request them. We obviously don’t want to go into negative margin after we’ve paid commission on the sale, paid taxes, covered soft costs like scheduling time, and paid the vendor to deliver services. We need to know the fully loaded costs of delivering services and the impact those services have to customer satisfaction, ramp time with software, and churn.
Visibility: How are projects handled? We should be able to see the date and time that services are delivered and more importantly integrate that into the accounting system automatically, so the finance team can recognize revenue properly. We also want to make sure we don’t bundle services as GAAP rules might require us to accrue revenue for software only once the services are delivered.
Customer Satisfaction Problems: Customers are often likely to call the sales team when they have a problem. We want our sales teams positive and out there selling, not back-peddling to deal with unhappy customers due to a service delivery problem. So we need a standard script for dealing with unhappy customers and refunds, especially when there’s a subcontractor involved.
Customer Surveys: Customer Satisfaction isn’t just reacting to angry customers when they call. We want to be proactive and reach out. We should always send an automated survey to check on on how customers feel about services being provided and consider having a seller call once services are complete to see if the customer needs anything else.
Follow up support: Can the subcontractor directly engage with the customer once services through our organization are delivered? If not, there should be strict rules around who owns the cusotmer. If so, then sales and account teams need to understand the potential impact to future services sales and be okay with that outcome.
The word “risk” is one of the most important aspects of services in an organization where services isn’t the core product. There is always the risk that something goes wrong with services. This can include travel delays causing resources to miss appointment times, customer satisfaction issues, accidentally damaging something at a customer site, and hundreds of other things we’ve seen. But services is still revenue. It helps the bottom line and helps diversify revenue.
We’ve seen services carry companies during otherwise lean times. This can help us grow without incurring debt or diluting equity. As we grow, services may continue to be a great part of our businesses. But we just want to be deliberate about our strategy. This means tracking the mix of sales that are services related, the fully loaded costs of every line of our businesses, and the amount of attention services require from the upper levels of the company. Once we understand all of this, we can make a thoughtful decision about how we want to proceed with services over time and re-evaluate those decisions annually. As with so many other aspects of our organizations - it’s all about being deliberate in how we expend our limited resources.