4 levels of Technology Services

It’s well-established that services businesses are very hard to scale. In most cases, you don’t need to: it’s a cash-flow business, and you won’t be blamed for treating it like an ‘asset’ that grows on its own, no matter how slowly. But if you’re in it for real, you need to understand the levels. Read on to learn more.

Level 1: Resource Placement Agency

This is where you religiously follow job posts from foreign companies and apply using a bunch of mostly fake profiles. At this level, you’re essentially an HR company. This is pure labor-arbitrage.

As you can guess, it’s an operational headache:

• You need to make sure that your developers don’t bypass the fake profile
• You need to make sure the client doesn’t bypass the fake profile
• You need to worry about turnover because the next developer is going to have a different voice on calls
• It’s hard to get people to sign up for this kind of arrangement
• It’s even harder to retain

If you can figure out the operational problems, you may be able to scale very well since the margins are really good. But most companies in this category never get to scale beyond 40-50 people because of the operational headaches. Some do, in fact they get big enough to change the entire narrative around them. Good for them.

Needless to mention, you are also not a value-add for the client. The developers you place may receive some training from you, but they don’t benefit from getting a real face-to-face exposure and always have to hold back in servicing the client in fear of being found out. Stellar performance in this arrangement falls down to personal integrity. But hey if it works, it works, no judging.

Level 2: Dev Shop

The only difference between this and previous level is that now you’re a little more upfront. Instead of finding job posts to apply on via fake profile, you make the approach at the company level. This is a proper “Dev Shop”. And again, labor-arbitrage (for the most part).

Landing sales in this configuration is hard. It’s painfully hard, especially now, with so much saturation in this space. The only way this works is if you have a liaison sitting abroad building relationships with clients on-ground. This is a “trust-oriented business”.

It’s nearly impossible to scale it otherwise.

The operations are relatively easier to manage, since all you have to do is make sure you deliver the right thing at the right time. No need to mask identities or convince your own talent to not bypass you. If the client is working with you, he’s trusting your management, not the employee, so there’s little danger of getting bypassed.

You are more of a value-add for the client since the rates will naturally tend to be lower otherwise the client has no reason to offshore or outsource to a dev shop. The margins are good enough so you do make some money, and if you actually manage to execute a few projects really well and build a portfolio that future prospects can actually see, sales become easier overtime.

Moreover, your team gets face-to-face exposure which actually builds some in-house expertise. If you make it a point to document every learning, you make your easy way towards level 3.

Level 3: Specialized Dev Shop

A specialized dev shop. It’s usually a natural progression for Level 2 agencies that are looking to raise their prices: find those few golden geese projects from your portfolio, list down their tech stack or the market (whichever is more distinctive), and double down on that.

Now you’re not just a dev shop, you are Fintech experts or Rust experts or Solana experts, etc. As long as you have a portfolio or the experience to back up the claim, you’ll do well.

Margins are solid since you don’t have much competition and have a clear value proposition to the clients. Operationally, you remove most of your headaches since you know exactly what to train people on, what processes to optimize, and what messaging to adopt in your marketing.

In many cases, you don’t even need an impressive portfolio to start here. You can start with a few personal projects, freelance on more, and eventually get something going. This is much better than, “Hey let’s hire a bunch of developers and then try to get them placed somewhere”. Doesn’t work.

The only downside is if your specialization is saturated, in which case, I wouldn’t really call it “specialization”. For example, “Web Development” isn’t a specialization now. Every agency has a Web Developer so you’re not really standing out. You may want to add a market sector to be more differentiated, e.g., “Building Geospatial Web Apps”.

If you stick with it long enough, you may level up.

Level 4: Productized Services

The holy grail of technology services. Highest margins, highest growth potential, lowest operational headaches. The transition might be painful though.

If you’ve been sticking with your specialization long enough, you’ll notice some recurring patterns: some services are needed again and again. Or maybe you discovered a gap in the market that you can fill with your expertise.

Now you sell a “solution” instead of a service. You sell a quick fix with a potentially subscription mechanism for the long run. Sales is much easier since you not only have a clear value proposition and very low competition (ideally), but also the prospect of ‘quick deployment/fix’ is very attractive.

It’s much easier to generate content, design a growth strategy, acquire and monetize customers and so on.

The only hard part is: You need a lot of experience and/or creativity to find that gap and fill it in a way that doesn’t turn into a one-and-done deal only. You need to make it recur somehow which requires even more thinking.

If you can figure it out, you’re essentially identical to a product business, hence venture-scale.

Conclusion

Yea I usually don’t do conclusions, but it deserves to be said here (again): you don’t need to follow this layout.

You also don’t need to think that these levels are progressions. Maybe you have a co-founder abroad who generates new business for you, and you’re not particularly business-savvy enough to figure out the steps to the next level. If so, stick to your strengths, you’ll scale much better that way.

The important thing is to realize which level you’re at right now and whether it suits you or not. If you see a clear path towards scaling in your current position, there’s no need to switch tracks or jump levels.

However, for most of you folks reading this, the reality is simply that Level 1 is too much of a headache, Level 2 is impossible because you don’t have a co-founder abroad, Level 3 is where it’s at and you can probably freelance your way up there, and Level 4 is what you should be striving for.

That’s it for today’s?Tech Consulting 101. Be sure to subscribe to get weekly updates right in your inbox.