We’re seeing a trend. Service companies are becoming product companies. More precisely, they are becoming software companies.
Service companies, especially those that are project based, are looking for ways to develop a recurring revenue component to their business. A project-based service company can be a management and financial challenge because there are many stops and starts as projects begin and end.
The teams at project-based service companies must also balance many clients and projects at once. It is like running on a treadmill that speeds up and slows down without notice, while juggling an unknown quantity of fragile items. If you own, manage, or work at a service company you can probably relate.
Service companies are subject matter experts and can develop deep and lasting relationships with clients as long as they can maintain the treadmill, juggling act consistently over time.
One-way service companies can change their model in almost every respect to add a product to complement their services. In this case, a product almost always means a software application.
Most service companies are not going to invent, design, manufacture, and distribute a physical product. Not that it doesn’t happen and isn’t a viable option for some service companies; it just isn’t the most natural or easiest path to adding a product to their offerings.
A software application does make the most sense and is the easiest to execute because service companies already are in the data and information business by providing their existing services. Data and information are at the core of every software application regardless of how the software is designed, developed, or distributed.
We know this is happening because we have developed software for service companies for many years, and we’re seeing the volume of these projects increase lately. We’re also a service company and we’ve developed our own software products over the years, so we know the impact this can have.
So what is the impact of adding a software application and, therefore, a product aspect to your company? The benefits can be substantial if executed well. Here are what we believe are the top three:
1. Recurring revenue: Most project based service companies have peaks and valleys financially as a direct result of projects starting and ending. If you don’t balance your production and your new project pipeline well enough, the financial inconsistency is unavoidable.
A software application, especially a Software As A Service one that is subscription based, can provide recurring revenue while augmenting your services. Recurring revenue from a software application provides financial consistency that you just can’t get from a project-based service company.
2. Service predictability: A software application also helps provide better balance within your service production, because you will let go of projects and clients that are too problematic and low margin in favor of providing your software clients with services related to the implementation and ongoing use of the software. So the software not only provides financial consistency and predictability to your company, it provides operational consistency and predictability.
3. Company valuation: Most service companies get a valuation of 1 to 1.5 times revenue. The fact of the matter is that being really good at what service you provide doesn’t affect your valuation that much. You are essentially worth the same, with your active client list (from the last three years) being the largest part of your value.
Service companies just don’t get valued at the same level as software companies. There are three fundamental reasons why:
a) Software gives you something proprietary.
b) Software gives you something portable and turn-key that someone else could own and run.
c) Software provides financial multiples for accounts, users and, yes, recurring revenue.
The path to adding a software application to your company isn’t as daunting as it might initially seem. The most critical piece is identifying the right opportunity and the need your software would be filling. Where is the best place to start?
It’s with your current clients and services. Look for opportunities related to efficiency, communication, information sharing, etc. in your current work and in your clients businesses. If you are intentional about looking for productization opportunities in what you already do, you will find some.
In summary, if you are a service company, especially one that is project-based, you might want to consider getting into the software business. The opportunities are there and the benefits to you and your company are many.