Author: Phil Clark, Founder of Embedded IT.
Recently, I’ve been pondering what the impact on Professional Services (PS) firms would be in the context of all of the industry and economic changes. For a long while, PS has been the gross profit generator of an IT company, however these premium services may be in for a shock in the medium to long term so I was interested in what would be the impact of the potential threats.
According to a definition on the Internet, “An [IT] Professional Service is an intangible product that a contractor or product vendors sells to help a customer manage a specific part of their business.”, by the sheer nature of an intangible product makes it complex to procure, complex to deliver, and complex to price. The majority of IT Professional Services are currently focused around specific technical skills, some of the recent industry shifts may make this more or less relevant, and from an IT Supplier’s perspective, understanding these shifts could make or break the profitability of the overall company.
A number of my views have been formed by my own personal experience of managing Embedded. Whereas not a large IT supplier, I get involved in many discussions around buying consulting advice (a form of PS), and have noticed there are some changes in the conversations which triggered much of my thought process. Similarly, colleagues of mine in industry who run PS teams are starting to notice industry shifts which will need to be considered for future PS offerings.
So I have brain-dumped some things I’ve noticed, primarily to start a conversation. If anyone has any views I would welcome them in the comments, its an interesting topic (if you are sad like me).
Risk transfer of contracts (Fixed Price vs T&M)
Ever an emotive discussion, I’ve noticed a trend towards Fixed Price contracts over Time and Materials, especially for more substantial contracts. Where Fixed Price used to be a good money spinner for IT suppliers, the ever increasing complexity and fragmentation of technology can make this a risky business model. More informed buyers are realising that this complexity can breed risk, and passing that risk to a provide for a relatively small premium is worth a go. The issue however (discussed later) is defining the fixed scope / outcome that is required for a given fixed price contract in an ever complex environment could make or break the success of a contract. All parties need to be aware of the detailed scope, approach and potential pitfalls of the services before they contract – without this there is definitely a risk of interpretation which will sour a relationship in minutes.
Agile / DevOps
As more and more companies embrace agile ways of working, Fixed Price contracts look more and more difficult to manage. Entering into a new fixed price service for a “we sort of want this” contract with multiple iterative sprint based features makes scoping PS services in this regard very very difficult. Agile can drive substantial efficiencies within a project, however combining with a Fixed Price preference can lead to major headaches for everyone.
Cloud (The journey to SaaS)
Quite a lot of businesses are procuring SaaS solutions instead of infrastructure and software. This removes the need for deep seated technical resources in part, because the infrastructure is largely in place and therefore traditional implementation services are not required.
SaaS however does present a whole set of new integration challenges which could generate an interesting PS approach. Application level integration, for non-standalone applications, brings its challenges and this specialist skill has a clear place in the PS stack. Also, the complexity of networking / connectivity with multiple SaaS providers per user in some larger businesses brings another need for specialist skills, like SD-WAN design and implementation, dependent on the scale. There are very few businesses who can configure a network to support the many to many application mappings, with associated prioritisation by user/site, that multiple SaaS solutions bring.
Automation
The drive for automation within the business process world brings both good and bad news for PS firms. Skills that would usually be the preserve of specialist resources are now being potentially replaced by Artificial Intelligence and Robotic Process Automation. My above reference to SD-WAN is an interesting one, with the initial build of a solution being complex at the architectural and design stage, but with self-healing / automated problem resolution, the ongoing need for these specialist skills are likely to diminish post implementation.
RPA / AI Professional Services however will be a great place to be for the short and medium term. The complexities of some of these technologies will required specialist resources that can leverage multiple client implementations to expedite build projects, but similarly the focus will be on business process rather than technical development – a skill set that not many companies will have to hand.
Volume of change on technology
Pace of change of technology is always going to be a factor in the acquisition of PS resources. With new technologies being released every day, many clients internal resources do not have the capacity, or the ongoing need, to maintain current skills in the latest tech, and therefore PS firms who service multiple clients, can fill this breach.
This is however a double edged sword. The investment in skills development / currency within a PS firm is immense, and picking the right technology strategy to support this investment (that has longevity in their target client) is tricky. The battle between major vendors in industry will always rage, and you don’t want to be the one who backed Betamax overtime, because running permanently benched resources with unused skills can be costly.
Partner to partner collaboration
For a PS firm with a specific niche, expanding sales channels to incorporate / promote their capabilities through other IT firms is a sensible approach to reducing benched resources. All of the above needs even more thought though, because contract risk, technological currency and IP ownership are even more difficult to manage when you are one or more steps from the end client. Similarly margin stacking / erosion can be costly, and as prices are squeezed downwards, these stacked business models could be difficult to justify.
An impending recession
Regardless of your political persuasion, I think its universally accepted that Coronavirus and Brexit will cause some sort of downturn, which will in turn change all buying behaviour. Many clients will be looking at costs more carefully, and paying £1500pd for a skill that they could potentially secure by training (or retraining) internal staff will inevitably become a pressure on the industry. Cash flow focus and stronger scrutiny on projects for Return on Investment will put Buyers in a difficult position to promote the perceived costly external resource market with their internal stakeholders.
Similarly PS firms will need to adapt to survive. Market pressures to reduce costs will become a factor in the maintenance of their cost base, and therefore maintaining a bench of costly technical experts may no longer be a sensible business model. Subject to the IR35 debate below, subcontracting skills through a “gig economy” approach may be a lower risk strategy for the supply side, albeit diminishing the value that an IT company brings (effectively reselling third party services) which in turn will diminish the margins available.
Tech firms who rely on PS margins will need to develop packaged IP and automation models that support profitable engagement whilst reducing hands on resources for their client projects. Repeatable, automated solutions for common PS tasks will drive an interesting evolution in the PS firms, as the differentiation moves from quality of skills to quality / flexibility of IP and packaging. This could be the birth of a new breed of channel partner.
The confusion around IR35
At a highly personal level, IR35 is a thing. Despite having multiple client revenue streams, not being 100% of any one client, being focussed on an outcome / project, being subject to a very short notice period and not gaining any benefits of employment, one of my clients deemed one of my roles as “Inside IR35” and after much investigation the HMRC helpfully concluded they were “undetermined”. The overhead of appeals processes etc. was not cheap, nor was the legal advice required to review contracts, and I have now learned my lesson in this regard. I was fortunate that COVID kicked this ugly can down the road.
But the wider PS world, from where I’m sitting, has not really woken up to this potential risk, which is coming in April 2021 (allegedly). Because the determination is made by the client regarding the “role” being performed, and not by the company / resource delivering the role, it needs special treatment and to ensure that contracts reflect the true nature of a client engagement so ensure there is no adverse impact for either party. An instant 30-35% drop in revenues because of “deemed employment” by a client who is erring on the side of caution could be at best inconvenient, and at worst the end of profitability for a contract.
Conclusion
As with other business models, Professional Services Firms need to carefully consider the future of their approach. The changing regulatory, technological and economic landscape will change buying behaviour, which could be an opportunity for some and the end for others.
PS Firms should start to think of methods of automating common or mundane skills as IP, and clamber up the stack to industry or business process specific areas. This value will continue to drive profitability and differentiation in a fragmented market. Similarly, maintaining a balance of internal and external resources will allow agility and flexibility in a dynamic market, and although using external contractors could erode margins a little, this could mitigate a major market change and protect internal staff costs from not being covered by revenue.
As ever, change is inevitable. In the same way that pure play Hardware Resellers have been impacted by changes in the market, and Cloud Service Providers are likely to be challenged in the imminent future with the commoditisation of cloud, Professional Services companies need to be prepared for a turbulent future and not just sit on their profitable laurels until its too late to adapt.
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