Subscription models touch every type of business from streaming entertainment to meals and clothing. Even service companies are providing them at an increasing rate through managed service offerings, where businesses outsource the management or maintenance of systems for a specified period, as opposed to paying for the services on demand.
For example, today we’re seeing more managed services for things like cyber security. Instead of employing in-house data security specialists, companies pay a monthly fee for a third-party to monitor security and provide patch management, backup and breach response services.
Managed service models offer a variety of benefits for service organizations. First, it provides predictable recurring revenue that increases cash flow and reduces risk of waiting for the next big project to drive revenue. Whereas traditional models are typically reliant on milestone completion or time and materials that vary each month.
In addition to revenue benefits, it also leads to improved customer relationships. Traditional service engagements are often contained to a specific statement of work after which the service organization is no longer involved unless additional hours are purchased by the customer. Managed services inherently provide a higher level of service to the customer as the service provider is part of the regular operations of its clients and are available as required.
Managed services also allow service organizations and their customers to be proactive, rather than reactive. Typically, organizations hire services when there’s an issue, called the Break-Fix model. In these situations, there’s downtime between identifying the issue and the project start data, allowing time for the problem to worsen. Further, there may be other hidden threats that are left untreated. The result is a frantic customer looking for fast solutions to a larger problem. Meanwhile, managed services provide constant monitoring and support when customers need it so issues are uncovered and addressed quicker.
Subscription and managed services represented a combined 17% of service work performed, according to an SPI study.1 However, this number varies by organization and type of work being performed.
Embedded service organizations (ESO), or service companies that are part of a product-driven organization, tend to perform more subscription and managed services than independent service organizations (PSO—28.5% versus 11.9%.1
Typically, ESOs already have recurring revenue on the product side, so providing services in a similar fashion is an easier transition because it follows a consistent business model. ESOs without a recurring element, like IT value-added resellers, are finding that their margins on reselling products are shrinking with increased competition from large distributors and customers shopping directly on sites like Amazon. To diversify, these businesses are successfully adding managed service offerings that allow them to sell both the equipment and manage the customer’s infrastructure. In fact, 40.9% of hardware professional services were performed via subscription or managed services.1
On the other hand, because PSOs do not have a product component, some are finding it more difficult to introduce a recurring revenue model as a standalone services organization. They can’t offer the same monitoring and maintenance services that product companies can, because they haven’t directly developed the product and aren’t as involved in new product releases. In addition, PSOs have found it difficult to translate traditional projects with a defined start and end date into a recurring service offering.
The amount of managed service contracts also varies by service type. Software as a service (SaaS) professional services are most commonly performed under a subscription or managed service model (40.6%), followed by software professional services (15.8%) and IT consulting (12.8%).1
SaaS and software professional services are experimenting with premium support subscriptions. Here support for software products are paid monthly or yearly and provided on an as-needed basis, as opposed to a large project with a specified start and end date. Customers are willing to pay a premium for the increased level of service from the provider rather than the traditional “wait in line” customer support.
However, more traditional consulting firms like management consulting and architecture or engineering firms are finding it more difficult to introduce these subscription models. Subscription and managed services only represented 9.4% of contracts for management consultancies and 8.3% of contracts for architecture/engineering organizations.1 Consulting and Architecture/Engineering firms are usually leveraged when there is a specific project or problem in mind, not a function that is ongoing. Therefore, it’s difficult to sell customers on paying for a regular service that’s not always necessary.
The managed service market isn’t going anywhere. In fact, it’s estimated to be worth $282 billion by 2023 (from $180 billion in 2018), according to research firm Managed Services Market(opens in new tab). Service businesses that haven’t offered subscription-based pricing yet should look for opportunities, whether it’s data security services, premium support, optimization or on-demand strategic or management consulting services to claim a piece of this promising trend.
For more on subscription and managed services, check out this video.
1.Service Performance Insight & NetSuite, LLC, “2019 Professional Services Maturity Benchmark,” (February 2019).