My last two entries have centered on the theme of embedded PS and the service partners of the product company. This is a delicate dance that often ends up toes being stepped on. In “Understanding Partner Needs” , I emphasized that one success tactic is for the embedded PS organization to clearly understand the needs of the service partners based on product maturity. In this entry, I want to introduce a second tactic embedded PS organizations can use to improve partner relationships: defining the “PS capture rate.”
When a product company sells a product, a certain amount of services opportunity gets created. For complex, enterprise class products, the services opportunity may be worth three or four times the amount of the initial product sale. For simple products, the services opportunity may be worth a small percentage of the initial product sale. This relationship is referred to as the services opportunity multiplier.
Once a product company accurately estimates this multiplier for a product offering, the product company can declare how much of the total services opportunity will be captured directly by the product company. The remaining services opportunity is left for the services partners. This slicing of the services pie is documented in the figure below.
By defining how large the total service market opportunity is, and by clearly defining what percentage the product company intends to capture directly, tensions with service partners can be reduced. The figure below provides an example of how one product company documents and communicates their target PS capture rate across four different classes of product maturity. As the figure shows, this company expects to capture more of the total services opportunity for aging “legacy” products because the partner ecosystem will be waning.
There is typically an inverse relationship between services capture rate and total services opportunity. When a product market is emerging, the total services market is limited. At this point in time, the embedded services organization may need to serve a large percentage of customer services needs. When the market takes off, services partners step in and the embedded PS organization can step back. Total revenues for the embedded PS organization may continue to grow, but the percentage of the total services market captured by embedded PS declines. Finally, as the product market becomes to mature and decline, the embedded PS organization may be called upon to step in and serve more of the service needs of legacy customers.
I have done some very rough modeling on PS capture rates for software companies. I believe software companies can comfortable capture 25% of the total services opportunity in growing product markets without creating significant tension with the partner ecosystem—but I do not believe this area has been studied thoroughly. I would be curious if anyone agrees or disagrees with this rough rule of thumb.