Growing Revenue in a Fixed-Fee World
Fixed-fee refers to the way a project is priced and delivered – the customer knows upfront what they are getting and how much it will cost. This happens in various industries but is most apparent in technology, and specifically software, companies that have an internal services organization that delivers projects to external entities – namely customers. This embedded services organization essentially runs a business within the larger organization representing both a cost and revenue function to determine profitability. Projects often include getting a customer up and running, but can also be bug fixes or customizations. In the past, this was commonly billed on a per-hour basis. There were extensive SOWs (statement of work) in place that brought the services team and the customer to an understanding of what would be delivered and how long it would take, but most of the liability landed on the customer – if a project ran over they would be billed for the extra time it took, but it was on the services team to keep the customer happy and avoid this circumstance wherever possible. Now that most software implementations are predictable and repeatable as organizations are moving from high investment, on-premise solutions to easily adopted, quick implemented cloud services, we are finding it is easier for everyone involved to offer a fixed-fee model and deliver an outcome rather than a complex deliverable schedule that the customer needs to understand.
The evidence shows in TSIA’s latest Professional Services Benchmark Report (2019) that this is the first year we are seeing more than half of services projects are fixed-fee (53%) in XaaS and as much as 66% for hardware companies. But the impact of the shift is changing how projects are structured, sold, staffed, and delivered. There are 3 key ways to grow revenue in this model:
- Margins, Margins, Margins: While margins always have and always will be important, what services firms are learning is that it is more important than ever to focus on margins – how much of the project is profit. Margins can erode quickly if a project has overruns and you can’t pass that onto the customer. Conversely, the easier and faster projects become, the more margins rise. John Ragsdale, principal analyst at TSIA research and advisory cautions that technology must be leveraged to automate and streamline PS processes to boost utilization and protect these margins.
- Knowledge Management: How you capture best practices and lessons learned at the end of every project (only 17% currently do that today according to the 2018 Knowledge Management Survey) can make a huge impact on your efficiency and ultimately your margins (see above). In the past knowledge management has been regarded as an asset and something not to be shared – it made a consultant more desirable because they had knowledge and expertise unique to them. Now, it is better for individuals and business to share that knowledge and impart it on teammates so all projects can see bigger margins.
- Build the Infrastructure to Scale PS: We are seeing a culture shift of early adapters to reduce training time by creating defined, repeatable projects that can be executed quickly. Embracing collaboration and knowledge share reduces training time and gets team members billable, faster. With better mobility and access to tools, companies are able to scale business and gain more profits. Ragsdale also warns that legacy processes for proposal and staffing are creating a project backlog and delaying time to value. The velocity of project proposal and staffing will accelerate scalability.
Conclusion: It’s time for PSA 2.0
PSA adoption is high but now it is time to take it up a notch. Automating processes and proposals will cut down on time to value and deliver results faster. Collaboration and knowledge sharing are areas that can improve margins. Maintaining this information in a system of record enables everyone access to shared learnings. Consultants are no longer building their brand by not sharing best practices, they now can now use it to standardize methodology and scale. Drive adoption through mobile and flexible solutions to increase the effectiveness of PSA.