Software companies that sell to enterprise and governmental markets have historically had a constructive and lucrative relationship with professional services. This has been particularly true in enterprise and government sales. Several years ago, Softletter published an article about the purchase by Rhode Island of a new client/server system to replace an antiquated Wang system that helped run the state’s judiciary scheduling and processes. It was roughly a $5M deal, with the sale of the actual software licenses representing about 30% of the package and the rest accounted for by the purchase of services, including implementation, consulting, training, support and related items.
What Professional Services do SaaS Firms Provide?
A majority of SaaS companies already provide professional services, though the revenue dynamic changes, as the following Softletter SaaS Report information illustrates:
Do you have a professional services group?
Source: The 2012 Softletter SaaS Report
Note, however, the revenue realities of SaaS professional services when contrasted with on-premise deals:
With the SaaS system, what percentage of an average sale over 12 months can be attributed to revenue generated directly by professional services? (For example, if an average sale generates $1,000 in recurring revenue over 12 months and your customers typically purchase $3,000 in advanced application training, the amount would be 25% [$12,000/$3,000]. Please add all professional service options that you provide to this number.)
|With the SaaS system, what percentage of an average sale over 12 months can be attributed to revenue generated directly by professional services? (For example, if an average sale generates $1,000 in recurring revenue over 12 months and your customers typically purchase $3,000 in advanced application training, the amount would be 25% [$12,000/$3,000]. Please add all professional service options that you provide into this number.)|
|1% to 5%||10%|
|6% to 15%||35%|
|16% to 30%||25%|
|31% to 40%||3%|
|41% to 50%||10%|
|51% to 70%||5%|
|71% to 90%||3%|
|91% to 100%||3%|
Source: The 2013 Softletter SaaS Survey
Note that the median percentage of revenue derived from sales of professional services ranges at around 20%. Attempts to push past these numbers can result in increased resistance from your customers, and as you approach 100% of the subscription revenue, this can even translate into almost savage resistance. Note also the relative unimportance of hardware integration and provision into the services mix. This should be no surprise to those familiar with the SaaS model.
The Perception of Professional Services by Your Customers
In professional services, the change in revenues generated is driven by several factors:
- The perception that SaaS is quick and easy for a company to subscribe to, implement, and train staff on new on-demand solutions. Contradicting this belief are expensive bills received for professional services; these introduce serious ’cognitive dissonance’ in the buyer’s mind. Upper management is not interested in seeing swarms of sales engineers and implementation specialists camped in company cubicles and empty offices after a SaaS subscription has gone into effect.
- Subscribers have expectations that the value of their subscriptions flows directly from the software, not from the professional services rendered. The mindset of the typical SaaS customer is that professional services ’tidy up’ the subscription commitment, not provide its ultimate value.
- Maintenance is almost impossible to charge in a SaaS environment. In and around 2005, as the SaaS industry began to revive, some firms attempted to include maintenance fees in their pricing models but quickly did a turnaround in the face of fierce subscriber pushback. Why? Because there is nothing to ’maintain’ in a SaaS system. Annual usage fees are possible, but they should not be associated with the word ’maintenance,’ which must be eliminated from the corporate billing vocabulary.
- Increasingly, SaaS subscribers expect that advanced support will be delivered from a customer community that decisively coalesces around SaaS systems.
- Many corporations have subscribed to SaaS systems because they wish to regard the expenditure as an OpEx and not a CapEx expense. Large expenditures in professional services confuse CFOs, who are the ones that tend to monitor CapEx vs. OpEx calculations.
Traditional classroom training for SaaS subscribers is disappearing. Empty classrooms are now the norm. Training has become an online entity, often with both instructor-led and self-paced delivery options. Many SaaS companies are choosing to provide customized training through partner organizations that have specialists on staff.
Professional Services Delivery
Today with SaaS, the delivery of professional services is far more commoditized and standards-based. Contracts are typically a fraction of the length found in larger on-premise implementations, and terms are far easier to understand. Key areas of differentiation are comprised of the following:
- After initial set up, companies offer simple packaged services with increased functionality.
- A typical project timeline may include four weeks of billable work accomplished over an eight-week time span.
- Initial fees are often only 25% of traditional on-premise implementation; plan for revenue from ongoing managed services, business, consulting and training.
- There is no single rule of thumb to determine the initial implementation and set-up fees for the services package.
- Projects are normally measured in weeks, not months.
- In terms of meeting budgets and timelines, project goals often shift to focus more on increasing subscriber satisfaction and utility of the software.