The yin and yang of product versus service: Embrace what you do and do it well

Do you provide a product or a service? I recently attended an AIMIA industry event titled “Creating value in digital agencies”, and the product versus service debate was a primary topic. While focused on software development, the conversation is important for any organisation exploring new strategies to increase value.

Product versus service in digital services

Two broad models exist in companies that deliver some form of information technology.  One is a product-based model, where you have a software solution sold to customers on a once-off per download / install or an ongoing license. The other is a service model, where you provide a fee that is based on the financial or human capital required to deliver an outcome. This conversation then raises three additional topics:

1. Value versus price

The value versus price debate proposes you should charge for the value returned from the service rather than what it costs to provide the the service plus whatever margin you can pass on.  A common example used from the advertising industry is logo development.  The time take to come up with the Nike swoosh was around 20 hours (excluding the intellectual property from the experience to develop the design), but the value to the brand is $13 billion. Moving to a value approach is dependent upon a client base and an industry that is mature enough to realise the value that is being delivered rather than the cost it took to produce it.

2. Profit share your service

This value conversation leads to another model of profit-sharing, whereby the one providing the service shares in the profit or intellectual property of the solution. This vests the service company in the solution as if it were their own product.  Software companies who go into profit sharing relationships need to understand that they are acting as an investor with all the necessary due diligence required of a venture capitalist or other financing institution.

This can sound attractive to customers wanting to share risk and makes the service provider accountable for their recommendations. The vested interest would also encourage the software provider to have a say in areas of the business outside of their remit, such as marketing or the behaviour of the business executives, that can place their vestment at risk. There is also an understandable push back coming from the technical community about reasons why they will not be the technical founder for someone else’s idea. This position is well articulated by the likes of Martin Gryner, Evan Tahler, and Jason Freedman.

3. Turn your service into a product

Another theme that often comes up in the conversation is for service companies to turn their service into a product. This involves packaging up repeatable intellectual property into a methodology or approach that forms a product in itself. This can seem a challenge when the service changes frequently, is highly customizable, services a wide range of industries, and is disparate across a range of technologies.

Case in point, my studio offers custom software development in technologies including Android, iPhone, .Net, SharePoint, and Flash. We service industries including government, manufacturing, warehousing, logistics, resources, financial, and retail. We provide services across the software development life-cycle, including business analysis and strategy, solution architecture, design, programming, dedicated quality management, and project management.  There are opportunities to turn aspects of this into a replicable product through flexible processes and methodologies, but it can be a challenge when compared to traditional product-based models.

Acknowledge the difference

The general vibe from the speakers felt as though companies who provide a straight service offering were on a fool’s errand.  The comparison given was between the hype of Instagram which sold for $1 billion with its 13 staff and a profitable large service-based agency is valued based on comparatively mundane rules of thumb.  With product being the rock stars of current start-up market, it is good to hear a defense for those with a service offering coming from venture capitalist Mark Suster when he facetiously asks “What should you do with your crappy little service company?”

The distinction between service and product has been made from both sides.  Harvard Business Review wrote about the distinction back in the 90s, some speak of the “servitisation” of product, software developer 37Signals speaks of the shift from service to product and IBM has been analysed for its move the other way.

Culture, leadership, and process have been highlighted as critical differences to acknowledge between the two approaches.  A focus on product development is a different mindset than of providing a continuous service. This requires dedicated and intentional leadership, with one speaker noting the need for distinct management structures for each channel if it is to be attempted in the same organisation.

Another speaker noted in a conversation following the event how they had to embrace the stage where the product idea is tested and validated and embed that validation through the development and market release process.  These are functions that service companies often leave to the client and can neglect when they try to develop their own products internally.

Do what you do well

Whatever you do, it comes down to how many opportunities you have to practice doing it well.  Mastery is created by repeating the same thing over and over again and learning from both mistakes and successes.

Before looking to product as a cure for their ailments, there are certain questions service companies should ask.

• Are your processes defined in a repeatable and structured manner?
• Do you have quality systems in place to plan, assure, and control your service delivery?
• Are you measuring your service performance and using those metrics to drive change in your business?
• Are you investing in research and development to drive efficiencies and innovation for you and your clients?
• Are you managing goals for your staff and creating a culture in which people want to work with you rather than for you?

On the other side, I have worked with product companies who do not have the commercial pressures to refine their processes.  The management of internal quality systems can lapse when you only deliver to yourself.  Bureaucracy and inefficiencies can emerge when your revenue is not tied directly to your hourly rate.

Confronting questions require honest answers before looking to product as the solution or adding a service channel to your product.  Part of this process needs to be ensuring you invest in doing what you currently do well before starting down a new path. If you do not, then you risk magnifying your current deficiencies in your new strategy where you may not have experience to draw from.

As always, these are my own reflections and observations based on my experience, reading and conversations.  I respect there are leaders who have made the transition as well as those who are now attempting the transition in our constantly changing market.  I welcome comments, clarifications, and critique on those who have made, are making, or decided to not make the transition between service and product.