To this date, one of the most common inquiries I receive from TSIA member companies is this:
How much revenue should a company like ours have coming from services?
How would you answer that question? Well, about four years ago, Geoffrey Moore and I set out to understand how product companies were answering that question. What we found is that very few product companies were explicitly answering the question, BUT product companies were consistently gravitating to very recognizable economic engines. The results of that analysis culminated in my third book, Bridging the Services Chasm. So, for the detailed to the above question, refer to the book. However, since this is such a common question, I decided to write a condensed response for my blog.
Let’s start with a hardware company. Someone like a Cisco or Juniper or Netapp. Their economic engines look very much like the one shown below.
In this economic engine:
- A majority of revenue is coming from products sales (say 60% or more of total revenues)
- The next biggest gear in their economic engine is support services (say 20%-30% of revenues)
- Finally, these companies may do some additional professional, managed, or education services. But those revenues will represent 10% or less of total company revenues.
So this is a very typical revenue mix for many product companies. We call it the 6-3-1 model. Even some software companies run this model. But, it is not the only pattern we found.
There are actually four economic engines that are common in the technology industry.
First of all, there is the 6-3-1 model I just showed. Very popular with investors and product executives alike. Product businesses are scalable and, historically, have been more profitable than service businesses. However, there is a 3-1-6 model which is almost the inverted version of the 6-3-1 model. In this engine, product only represents about 30% of total company revenues, support is a roughly 10% and the majority of revenue is being generated through consulting revenues. Who would run this economic engine? Startups. Wrapping lots of services around an emerging technology is one of the known tactics employed to drive early adoption.
Next, we found many companies running a 3-5-2 model. This is where product is roughly 30% of company revenues. The big gear in the economic engine is support revenues, and other value added services like PS and education represent roughly 20% of total company revenues. This model is very common among successful, mature software companies (think SAP). This model is the reason the software industry is averaging 70% of total revenues from services.
Finally, we found some companies running a 2.5 model. This is where revenues are pretty much evenly distributed across hardware, software, support, and services like consulting and outsourcing. IBM and Xerox are classic examples of this economic engine. HP, with its acquisition of EDS, is clearly on a path to migrate to this model. The four common economic engines are shown below.
When you look at the patterns presented in these four economic engines, it is now much easier to understand the pattern of more revenues coming from services. It is clear more product companies are migrating off of the 6-3-1 model and migrating to one of the other, more service intensive, economic engines.
So, how much revenue should your company have coming from services? It depends greatly on which of these four economic engines you are attempting to execute and optimize.