4 Paths to Service-Led Growth
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
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Service-led growth has been attracting attention as an alternative to product-led growth. It is a more reliable, less capital-intensive approach that supports the development of deep, long-term relationships.
We have introduced some pricing considerations for Service-Led Growth here.
In service-led growth, value is first created through professional services. Instead of ending once the services are delivered, a software solution is put in place to track the outcome of those services and to provide ongoing, long-term value. This software collects data that generates insights. These insights are used to trigger and inform new professional services. The result is a powerful growth flywheel. This is sketched below.
To date, few companies have gone to market with a well-articulated plan for service-led growth, though this is beginning to change. It is more common for companies to come to service-led growth through one of the four following paths.
Build from professional services - firms are responding to the commoditization of AI, the prevalence and availability of data and the need for long-term customer relationships by layering software and data services
Support software - software companies are finding that the product alone will only take them so far and that professional services are needed to support growth in customer lifetime value
Introduce a new technology - raw new technologies are most often implemented through professional services as use cases and business logic are explored
Integrate a mature technology - as a technology matures and is integrated into the ecosystem value shifts from the software to the services needed to support it
Let’s look at each of these paths in more detail.
Build from professional services
Leading professional services firms are moving to execute a service-led growth strategy. This is most evident at the big strategy consulting firms. We have written about how McKinsey is doing this elsewhere (Why services companies discount software). All of the major strategy firms are taking this approach, from BCG Omnia and Bain to Simon Kucher. There are other approaches though.
In some cases, professional associations are supporting this transition by providing software platforms to their members. This is particularly common in accounting, where in the United States the for-profit arm of the Certified Public Accountants, cpa.com, has partnered with a number of software vendors to provide its members with a long-tail of subscription services. Other professional associations are likely to follow suit.
This strategy is not always successful of course. The iconic architecture firm Gehry Partners attempted to spin out its parametric software solutions (which were built on underlying software from Dassault) as Gehry Technologies. They even raised private equity funding to support this. Gehry Technologies was not able to reach escape velocity as an independent company and was eventually merged into Trimble Consulting. A more focused, service-led growth approach, rather than an attempt to become a pure software company, might have been a more successful strategy.
Support software
The simple truth is that all B2B software sold to companies of any scale (say larger than 500 people) requires some services. The pure product-led growth strategy only works with small and medium businesses (SMBs). As companies get larger, they need and expect more support. They require everything from change management and implementation services to integrations and help desks.
There have been three approaches to this. Let’s call them the Salesforce, IBM, and SAS Institute models.
Salesforce, the iconic ‘No Software’ SaaS company, largely avoids providing services itself and instead has supported the growth of a service ecosystem around it. Examples are Isobar and Traction On Demand. There used to be a lot more such companies, but over the past decade, they have been snapped up by the large integration vendors.
IBM has taken a different path, developing its technology platforms and applications in parallel with a massive global consulting operation (IBM Services). The challenge now is to put these together using a service-led growth strategy.
SAS Institute, the analytics software platform, has taken a different approach. From the beginning, back in the 1970s, it has forged its own path, using what we would call a service-led growth strategy. There are many lessons to learn from SAS Institute, which is one of the largest employee-owned software companies. This is not a coincidence. Service-led growth is highly compatible with employee ownership.
Introduce a new technology
Before one can build a product, one has to narrow things down to the small set of user stories and use cases that will drive the business case.
For B2C products there is not a lot of choice here. One must do market research, talk to a lot of people, build and test prototypes, and try to get to the product market fit as quickly as possible.
Service-led growth is an alternative market entry strategy for B2B. One explores a number of applications, developing technology, supporting processes, and value propositions by getting people to pay.
In most cases, the people willing to pay will be the early adopters (in Geoffrey Moore’s terminology) and one has to be skeptical about how much they are willing to pay (which is often more than one will get later in the technology adoption cycle) and some of their requirements, but this is the best way to finance the commercialization of a new B2B technology.
With much thought and effort, one will be able to take the insights and capabilities (people and technology) developed in this early work and use it to cross the chasm to the early majority market.
Integrate a mature technology
Early adopters and the early majority are not the only targets for service-led growth. Mature technologies, where the underlying functionality is well understood, are often a good target. These technologies have often been open-sourced. Some people associate open source with cutting-edge technologies, and this is sometimes true. However open source is more likely to be found in well-established technologies and platforms. This is true of operating systems like Linux, databases like PostgreSQL, and even learning management systems like Moodle and Totara.
These mature technologies all support vibrant service-led growth companies. The largest success story is probably Red Hat Linux, which grew to be a public company before being acquired by IBM (one of the masters of service-led growth) for $34 billion in 2019.
Professional services companies looking to execute a service-led growth strategy do not need to jump into technology development. An alternative is to bring together a suite of open-source projects, integrate them, support them with business processes, and ensure that value is being delivered over time.
Over the next five years, a number of companies are likely to execute this strategy for AI and machine learning, leveraging platforms such as Keras and Tensorflow.
Read other posts in the Service-Led Growth series
Four paths to Service-Led Growth (this post)