I’ve seen this play out so many times over the last few years.
A business leader at a services firm will sit down and talk about how they’re working on a product. S/he will quote the usual mix of arguments – services as a business is struggling; Indian firms have challenges making products but they think they can do it this time; automation/products are key to their future – and finally end by being confident about the potential.
A few months down the line, the business leader will lament about how the ‘team’ doesn’t get it, and how tough it is for services firms to think ‘product’. Management will consider hiving the product team off into a separate location, or even moving the product business out as a separate firm.
In most cases, the end is predictable. The services firm realizes that the product business is radically different from what they’re used to. The product experiment they started off with didn’t play out the way they anticipated. They usually shelve the product arm, or make the arm build products only for internal consumption, while their business continues to be services or managed services build on top of the product.
Why do things go wrong?
Most business leaders will reflect that their teams didn’t have the product ‘mindset’, but in reality, there are a combination of factors that affect this.
I’ve listed them in three buckets
- Product management & skills
- Business strategy
Product management skills
Inability to understand market needs
Most services firms are used to a pattern of bidding for RFPs, winning the deal, and then assigning a bunch of business analysts (BAs) to handle requirement gathering.
When they start experimenting with products, they graduate some of the BAs to become product managers. After all, they know client needs, right?
In practice, a lot of BAs struggle as product managers. The challenge is not with their skill or ability, but in their organizational roles thus far.
Most business analysts are used to starting on a specific client engagement, working with IT/business leaders and listing specifications for their teams. Their role involvesefficient translation of existing requirements.
However, for good products, there is no ‘client’ to give requirements. The challenge for product managers is to unearth requirements based on knowing market needs and customers so well that they can design a product without getting a business requirement document.
This is not about not asking customers for what they want (people often state the oft repeated lie of Apple not doing consumer research when this comes up), it’s about understanding the customer requirements better than they can, and coming up with a product design that would suit their needs.
This is one of the toughest steps in the journey, and one that most firms get wrong.
The inference seems simple, but I find that services firms need a lot of coaching on the process to even start thinking along these lines.
The myth of ‘productizing’ services
This is closely linked to the previous point.
Many services firms start thinking of products after they receive requirements for something new from one client (eg: data analytics). They believe they can easily productize requirements to come up with something they can sell to other clients.
This rarely works.
Building for one client often means that your product is so specific to their needs that you will have to make significant changes when you take it to others.
This means making modifications to existing design, that services firms usually agree to thinking they’re doing products. Very quickly, they realize that they’re back in services mode.
What is required is to build something that the clients feel they could adapt to instead of the other way round. That comes only when you can bring in market knowledge into the product instead of just client knowledge.
Lack of product marketing skills
Building a product business is a lot more than just building a product.
In practice, the product marketing team has to spend time positioning the product right, building the right communication stories and getting customers to feel the product is right for them.
This takes a totally different skill set than sitting with the client and getting him/her to sign off on a service delivered. It involves a lot of business storytelling, segmentation, messaging and more.
Most services firms do not have experience with these skills, as their marketing teams have largely been involved in corporate marketing, branding and events.
Incentives and organizational enablers
When services firms look at building products, they often ignore the rest of the go-to-market cycle.
For instance, a couple of services firms I know built specific sales teams for products. However, they drew the team members from existing services and presented product selling as a fresh opportunity.
The sales team quickly realized that product selling & business models are very different. Where they could ratchet up millions in sales revenues from a single client (and accordingly, earn their incentives), they now had to spend a lot of time with multiple clients to convince them about licensing deals and the like. This was a lot of additional effort that saw the sales team quickly lose enthusiasm.
In another firm, the product team tried piggybacking on existing sales representatives or account managers. However, they realized that the sales team would often offer the product for free as a sweetener to clients to win deals. After all, their primary aim was to close deals, not sell products.
Existing brand perception
“But we thought you were into <services>. Why are you doing products?”
Products from services firms live in the shadow of the larger brand, and often this gets in the way of customers treating them seriously.
Clients often do not believe that the firm will ‘stick it out’ in the product game, as they are known for services. Hence, they are often reluctant to place bets on products from services firms, even if they have an existing relationship.
The existing brand perception often interferes with the product positioning as well. Rather than flowing as a natural extension of the brand, the product positioning has to dodge references to existing business that may confuse the market.
Legacy relationships & contractual agreements
Most services firms have signed contracts with clients that clearly state all ownership of data/IP lies with the client.
When they begin thinking of building products, they usually find that even good ideas need amendments to contractual agreements to let them use data. Client account managers are hesitant to get into the discussion, and clients too look at such requests with some reluctance – after all, the benefits for clients is rarely commensurate with the risk.
Risk of new disrupting the old
Many services firms announce their foray into products and platforms with flourish. While this brings their product business into focus, it also serves to threaten existing business lines.
These shifts are rarely easy, and there are often a set of well-entrenched players within the system who are skeptical, scared or both about the new developments. Inability of leadership to place the product offering within the larger organizational context often leads to existing verticals undermining the new efforts, and sometimes, even cheering failures.
Lack of strategic importance in firm’s business
Product businesses need time. Services businesses are about immediate revenue flows.
Services firms often lack patience to wait for the product businesses to steady themselves and contribute to the firm’s bottom line. After the initial buzz, many services firms lose focus on the product business (or treat it more like a marketing/PR exercise) as it doesn’t contribute in significant ways to the company’s bottom line.
In case the senior leadership/CEO has committed revenue numbers to the board/shareholders, there is added pressure to quickly show revenues. This often leads to shadow revenues (accounting for revenues for product usage within firms own services – often leading to double accounting) or drifting to managed services on top of product lines to build revenues.
In both these cases, the focus quickly shifts away from giving the product business its space.
These are factors I’ve observed, and I’m happy to hear thoughts/arguments about the topic. Please leave your comments below.