Investors Love and Hate SaaS Professional Services

If you were to ask 100 SaaS CEOs whether they want a professional services team, 95 would probably say “no.”  Revenue from professional service engagements has much lower gross margins (30-40% range) than software subscriptions (80-90%).  As a result, investors don’t place much value on the professional services revenue streams.  If you were to ask 100 investors if they want their SaaS portfolio companies to have a professional services business, 100 would definitely say “no.”

Customers have a different perspective. While some companies prefer the self-service, DIY model of product-led growth, many organizations want a higher-touch support model from their technology vendors.  If you were to ask 100 customers if they want their SaaS vendors to offer professional services, 60 would say “yes.”  Many of those 60% who want the higher touch are also the companies with the bigger wallets. The highest area of need is usually the initial implementation and onboarding, but many customers want support throughout the lifecycle.

If you were to ask 100 SaaS CEOs whether they want a professional services team, 95 would probably say “no.”  Revenue from professional service engagements has much lower gross margins (30-40% range) than software subscriptions (80-90%).  As a result, investors don’t place much value on the professional services revenue streams.  If you were to ask 100 investors if they want their SaaS portfolio companies to have a professional services business, 100 would definitely say “no.”

Customers have a different perspective. While some companies prefer the self-service, DIY model of product-led growth, many organizations want a higher-touch support model from their technology vendors.  If you were to ask 100 customers if they want their SaaS vendors to offer professional services, 60 would say “yes.”  Many of those 60% who want the higher touch are also the companies with the bigger wallets. The highest area of need is usually the initial implementation and onboarding, but many customers want support throughout the lifecycle.

Value Engineering

Some customers want professional service engagements long before they even make the initial purchase.  Value engineering teams are critical to helping large enterprises assemble a business case for major technology purchases.  There may be a need to redesign business processes for the future state design which requires a detailed review and analysis of the current operating model.

Implementations

Once the initial purchase is made, there is a strong desire by both the customer and the SaaS provider to ensure a smooth, on-schedule implementation process.  The biggest area of risk for the SaaS company is customers who purchase but never go live due to unforeseen hurdles in the implementation process.  These failed implementations often result in churn and ugly legal disputes about refunded fees.  Failed implementations are bad for the customers, too.  The business champion within the customer organization walks away with “egg on their face” and the business suffers delays in realizing the business benefits it was expecting to achieve.

Even with self-service PLG models, the initial onboarding is a high-risk area. If the customer does not invest the time to configure and onboard the product, they will churn.  With a self-service model, the SaaS company knows the product is being adopted but rarely has insight into why it hasn’t.  Automated emails are typically used to nudge the customer to take the next step in the relationship.  In some cases, a support resource may reach out to schedule a time to assist.

In the area of implementation, a professional services-led model with a higher-touch can actually improve the odds of success.  The SaaS company takes shared accountability for getting the technology live.  As obstacles are encountered, the professional services team can work with the customer to overcome the issues.

Data Migrations and Integrations

Implementations can get really messy.  Large enterprises might be consolidating from multiple legacy systems onto a SaaS platform.  The data from the existing applications must be mapped, transformed, and uploaded into the new system.  Integrations are often the Achilles heel of the implementation process, particularly when the connection is to a core ERP or CRM system.  If a new SaaS app cannot talk to SAP or Salesforce, its dead on arrival.  The root cause of the issue is often that the ERP or CRM application has been so customized that a standardized approach to integration won’t work.

Industry-Specific Needs

Some professional services offerings are unique to the products offered by the SaaS company.  For example, Crowdstrike offers incident response and forensic investigation services to support its cybersecurity offerings.  ON24 offers monitoring, experience management, and production of its virtual event services.  Workiva offers XBRL tagging and document sets for the regulatory filings it helps customers create.  Qualtrics provides research services to gain market intelligence as part of the customer experience management offering it provides.

Using Business Partners for SaaS Professional Services

Few, if any, SaaS CEOs or investors would disagree with the need for consulting resources to help customers who want high-touch support.  They just don’t want the headcount on their org chart or their income statement.  They would prefer that a business partner do the professional services work.

Systems integrators such as Accenture, KPMG, Deloitte, Capgemini, PwC, and EY take on many of these consulting engagements for large enterprise accounts. BPO firms like Genpact, Infosys, WiPro, and IBM also take on some of these engagements. For small businesses, the work often goes to specialized consulting firms, value-added resellers, and fractional CXO firms.

Challenges Creating Partnerships for SaaS Professional Services

The partnership between SaaS providers and professional services firms should be a perfect marriage. The SaaS providers can focus on delivering productized technology at their high gross margins and let the consultants handle all of the high-touch, human-centric work using their model. While partnerships sound like a “no-brainer” in theory, in practice, they are anything but simple.

For a scale-up SaaS business, creating these partner ecosystems is not easy.  It doesn’t take much convincing for a system integrator to build a practice around the technologies offered by the top 100 SaaS vendors.  However, it does take a lot of selling to convince both large and small consulting shops to invest time and energy to learn a product from a SaaS vendor that hasn’t made it big yet.

Professional services firms prioritize billable hours.  They don’t want $250 per hour consultants sitting in online training courses learning to configure an application they may never touch.  Professional services firms often want to see a steady flow of engagement opportunities before they are willing to invest the time required to build expertise in a SaaS application.

There is often a chicken-and-egg problem that SaaS providers face with professional services.  We need external consultants to build practices around our technology in order to scale and grow our customer base.  However, the services firms won’t build practices until the SaaS company refers a meaningful number of customers to them for engagements.  This conundrum is one of the reasons why SaaS companies have to build out professional services teams as they are scaling up.

Challenges Executing with Business Partners for SaaS Professional Services

Even when SaaS companies overcome the obstacles and succeed in getting business partners to build expertise around their technology, they find the customer experience to be far from perfect.  It takes time for institutional knowledge to build up within a consulting firm.  Services firms need to live through 5, 10, or sometimes even 50 engagements before they really understand how best to guide the client.  Unfortunately, some of the best learnings come from the failed projects.

This is another “chicken and egg” problem.  The business partner cannot develop expertise without real-world customer engagements.  However, customers don’t like being guinea pigs for consulting shops that have limited experience with the technology.  Often, professional services firms will assign junior staff with no experience in the SaaS application to work on the project.  The consulting firm is effectively learning “on the job” and “on the customer’s dime.”  A series of minor setbacks due to inexperience can erode the customer’s confidence in the business partner and lead to escalation with the SaaS vendor. Larger customers will sometimes insist that the SaaS provider staff the professional services engagements with their own badged employees who are experts on the product.

These customer experience challenges are another reason why SaaS firms end up with large professional services teams on their org charts.

However, in earlier-stage SaaS companies, professional services are often viewed as a loss leader. Sales teams are willing to heavily discount services pricing rather than lower subscription pricing and impact ARR.  For example, a Series B SaaS company with high-growth aspirations may offer its initial implementation package at a 50% discount to customers who sign an annual contract at list rates for the core subscription.

Contracts for SaaS Professional Services

Billing for SaaS Professional Services

Billing strategies vary and are often dependent on the contract structure and pricing model.  If a subscription and professional services engagement are bundled on the same contract, the SaaS provider typically will invoice upfront before the work has started.  In scenarios where a separate statement of work has been written, the billing may occur in arrears throughout the project.  For fixed-fee projects, the billing could be tied to specific project milestones or customer acceptance of deliverables.  With time and materials billing, invoices are often sent on a monthly basis for the hours worked and expenses incurred.