A lot has been written about the future of professional services in SaaS and in particular how this component of a software business continues to change. Tomasz Tunguz recently wrote a fascinating piece about how the economics of professional software have changed in the SaaS industry. We’ve spent a fair amount of time thinking about this challenge as our portfolio companies mature and think about adding more and more professional services to their revenue organization. The primary vectors tend to be both in support of closing new customers as well as increasing existing customer success. Outside of this component, we’ve seen many SaaS companies take share, build out entirely new ecosystems, or work alongside the external Systems Integrator (SI) category of vendors in new and unique ways. Relative to these two large buckets of professional services, below are a couple of interesting trends and themes we are seeing in the market today that speak to the future of professional services in SaaS.
1. Deployment Speed Continues To Make Life Easier. Siebel deployments needed $250 per hour Oracle consultants on site for 3 months. Salesforce is set up in a day or two. Life continues to get easier for IT buyers in this day and age and we are in a beautiful time where product led SaaS organizations continue to focus on how to build best in class experiences that require little time to get up and running. High tech doesn’t have to mean high touch any more. It will be interesting to see how far this trend goes especially in the core system of record category where professional services is still very necessary. Could we get to a day where professional services completely goes away?
2. Overall Market Sizing Likely Much Smaller Than Ten Years Prior. This may be a bit controversial, but pretty much any data that we spend time with supports a much smaller, less relevant industry. Revenue trend lines within many of the Global Business Solutions groups at places like IBM and Oracle continue to trend downward. Consulting as a percent of their overall revenue also continues downward. Newly formed SIs that seek to handle the next generation of SaaS companies like Shopify or Workday are generally much smaller businesses than their predecessors. What was once a booming and massive industry is just getting smaller, and smaller, and smaller. Will this revenue become almost non-existent as we enter a v3.0 of SaaS systems of record and point solutions?
3. Valuation Impacts Will Be Interesting To Understand. Something that is tough to draw from today’s data but will be interesting to chart in the future is the correlation between professional services revenue as a percent of overall revenue and valuation. We are in the early innings of a public data set that can support this, but we continue to think here about the “addition by subtraction” mechanism that could happen if a public SaaS company strategically focused on limitation of professional services (or outsourcing of it) and whether that had any impact on valuation. If you are a SaaS 2.0 CEO in the public market and trying to drive your stock price up, are you better off killing or trading your professional service revenue and having a smaller percent of overall revenue come through that channel resulting in higher valuation? Effectively, you’re adding value by subtracting complexities and reducing your offerings (a very counter intuitive concept). We don’t have a complete story yet in the market but could limitation support a higher margin business and likely a higher stock price?
If you liked “The Future Of Professional Services In SaaS” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog.
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