The Role of Professional Services in a SaaS Business

I love to create reductionist mission statements for various departments in a company.  These are designed to be ultra-compact and potentially provocative.  My two favorite examples thus far:

I like to make them based on real-life situations, e.g., when someone running a department seems confused about the real purpose of their team.

For example, some police-oriented HR departments seem to think their mission is protect employees from management.  Think: “Freeze, you can’t send an email like that; put your hands in the air and step away from the keyboard!”

I think otherwise. If the HR team conceptualizes itself as “helping managers manage,” it will be more positively focused, help deliver better results, and be a better business partner — all while protecting employees from bad managers (after all, mistreating employees is bad management).

Over the past year, I’ve developed one of these pithy mission statements for professional services, also known as consulting, the (typically billable) experts employed by a software company who work with customers on implementations after the sale:

Professional services exists to maximize ARR while not losing money.

Maximizing ARR surprises some people.  Why say that in the context of professional services?  Sales brings in new ARR.  Customer Success (or Customers for Life) is reponsible for the maintenance and expansion of existing ARR.  Where does professional services fit in?  Shouldn’t they exist to drive successful implementations or to achieve services revenue targets?  Yes, but that’s actually secondary to the primary mission.

The point of a SaaS business is to maxmize enterprise value and that value is a function of ARR.  If you could maximize ARR without a professional services team then you wouldn’t have one at all (and some SaaS firms don’t).  But if you’re going to have a professional services team, then they — like everybody else — should be there to maximize ARR.  How does professional services help maximize ARR?  They:

  • Help drive new ARR by supporting sales — for example, working with sales to draft a statement of work and by building confidence that the company can solve the customer’s problem.  If you remember that customers buy “holes, not bits” you’ll know that a SaaS subscription, by itself, doesn’t solve any business problem.  The importance of the consultants who do the solution mapping is paramount.
  • Help preserve/expand existing ARR by supporting the Customer Success (aka, the Customers for Life) team, either by repairing blown implementations or by doing new or expanded implementations at existing customers.  This could entail anything from a “save” to a simple expansion, but either way, professional services is there maximizing ARR.
  • Help do both by enabling the partner ecosystem.  Professional services is key to enabling partners who can both provide quality implementation services for customers and who can extend the vendor’s reach through go-to-market partnering.

Or, as our SVP of Services says, “our role is to make happy customers.”

I prefer to say “maximize ARR without losing money” but we’re very much on the same page.  Let’s finish with the “not losing money” part.  In my opinion,

  • A typical on-premises software vendor drove 25% to 30% gross margins on professional services.  Those were the days of one big one-shot license fees and huge multi-million dollar implementations.  In those days, customers weren’t necessarily too happy but the services team had a strong “make money” aspect to its mission.
  • A typical SaaS vendor has negative 10% to 20% gross margins on services (and sometimes a lot more negative than that).  That’s because some vendors subsidize their ARR with free or heavily discounted services because ARR recurs whereas services do not.

I believe that professional services has real value (e.g., I’ve worked with several amazing services teams) and that if you’re driving 0% to 5% gross margins with such a team that you are already supporting the ARR pool with discounted services (you could be running 25% to 30% margins).  Whether you make 0% or 10% doesn’t much matter — because it won’t to someone valuing your company — but I think it’s a mistake to shoot for the 30% margins of yore as well as a mistake to tolerate -50% margins and completely de-value your services.

15 responses to “The Role of Professional Services in a SaaS Business

  1. When I ran consulting teams I always told my consultants that sales was their responsibility too. Nobody is better positioned to upsell and existing customer than your consultants whom the customer knows and trusts (if they are doing a good job and creating value of course).

  2. If services are recurring, do you ever include those in your ARR? If so, would an investor value that portion of ARR as highly as the software license?

    We have different levels of annual support contracts and separately have installation fees and onsite training (these are clearly one time, non-recurring professional services).

    We call out the annual support as a separate line in our customer contracts. This is helpful to maximize the perceived value in the customer’s eyes. However, we are wondering if we need to fold that into the license cost in order to maximize valuation or if investors are OK with recurring professional services being part of the ARR.

  3. Agreed, Marc! It also helps with a smooth hand-off between sales and implementation if the PS teams are involved in the sales process.

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  5. HR exists to help protect the company from its employees

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  7. I agree that driving and supporting ARR in a SaaS company is the first and foremost objective. In any product company, SaaS or otherwise, I like to position PS as there to expedite customer benefit realization. Rapid adoption provides increased opportunity to expand, and mitigates churn. PS revenue contributions, at healthy margin, are essential to not dilute overall margins. PS as a loss leader is unacceptable, and unnecessary if the product has market fit. If PS is being given away for free, then there’s likely a foundational product value issue that needs to be addressed for sustainability and scalability.

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  12. Dave, What metrics (that will make it into consultants’ comp plans) would you use if PS is focused on ARR maximization rather than revenue/profit (billable util %, revenue attainment)?

    • Hard question. I do know if you comp the VP of services revenue and margin then they are going to maximize those things, so I’d say a traditional services comp plan is usually part of the problem, not the solution. I’ve tried many things and can’t say I’ve found any universal code, but metrics to consider: utilization (whether billable or not, e.g., fixing a top broken customer for free should count as “work” and if PS mgmt let’s other junk get called utilization, they’re the problem), regional/unit NPS(i.e., if you work in a region, is your region satisfying customers), regional ending ARR (which theoretical incents helping sales and customer success). Net: if your comp plan says the best consultant is the one who bills the most at the higher margin, that person will never want to work on low-margin or zero-margin deals even if they most help the company (and they should probably just not work at a software vendor and go work at a consulting shop). In effect, you need to incent want you want and then make sure management is doing their job on deploying resources effectively which, in the end, usually means ARR. Also a question or quarterly vs. annual metrics in that mix.

  13. Question – Do you consider professional services as ARR? Not implementation fees but other professional services sold along with the product.

    Also, does the analogy (of “exists to maximize ARR while not losing money”.) apply to premium support or customer support teams as well?

    It would be great to hear your 1 line pithy mission statements for

    a. Customer Support
    b. Finance
    c. Chief of Staff / BizOps
    d. Sales
    e. Engineering
    f. Design

    Thanks for sharing amazing content :)

    • Short answer is no, I don’t. Sometimes a CSM who is onboarding and support related (and ergo kind of PS-y) would be included in ARR and ergo subscription COGS. But by professional services I mean charged (often radically undercharged) services typically associated with onboarding.

      For premium support, no, I’d not automatically apply that mission. They are more a “product” — i.e., if the SaaS subscription costs $50K without and $70K with premium than I’m charging $20K/year for premium and I’d like to analyze that product internally on its own — how much to deliver it, how much do we make/lose on it. In my perfect world, it would make money and more at subscription margins than services margins.

      As for the rest, I only gen up these pithy mission statements when I really stumble into one and love it. So I don’t have a bunch handy for other depts! (HR = help managers manage)

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