Paying Up: Structuring Professional Services to Propel SaaS Growth

Your big-picture goal is to sell SaaS products, but these PS monetization tactics will keep your team efficient and customers happily aligned along the way.

As software companies consider efficiency improvements on their paths to profitability, monetizing the professional services (“PS”) function is often an easy place to start, and can also pay dividends in terms of driving longer term customer retention.?

Most sales-led (i.e. not product-led or self-service) SaaS companies will stand up a PS-specific P&L as their business matures, but there is a delicate balance to be struck in doing so: the name of the game is not to build a massive services business. ARR is the highest quality revenue a SaaS company can earn, so ideally PS will never contribute more than ~10% of overall revenue. Moreover, the “nickel and diming” SOW hangover is very real for software buyers, so it is important for SaaS companies to align services bills to activities that really drive customer value and avoid getting greedy. In my heaven state, SaaS businesses aspire to break even on their standalone PS P&L, but are not aspiring to celebrate it as a profit center.

Startups have long debated whether or not to charge for services, especially when it comes to new customer implementations. (When referring to “PS,” we are including both new customer onboarding as well as various ad hoc services that can be offered throughout the customer lifecycle; today we’ll focus most of our attention on new customer implementations.) With the benefit of years of pattern recognition observing onboarding processes that have gone well and others that have gone off the rails, I’ll say this: implementations work better when customers have skin in the game, so I am a huge proponent of charging for them. Yes, there is some nuance to that opinion that we’ll discuss in more detail later in this post–namely, companies must be able to clearly communicate progress and value in an organized way before charging–but I stand by this sentiment as a blanket statement.??

While Chief Commercial Officer at Sailthru, my team actually conducted an analysis comparing the net retention curves and net promoter scores of various customers based on their implementation bill rates and profit margins (more on both later). Time and time again, our most unprofitable implementations also yielded the unhappiest customers. At Primary’s May “On the Business” event , Braze CFO Isabelle Winkles said it best: the aim of selling services should ultimately be to sell more software.

Covering the cost basis of the PS team enables SaaS companies to further invest in ensuring smooth implementations–both in terms of people and tooling to make life easier for both the vendor and the customer–and well-resourced teams ultimately mean more productive, fully implemented customers. As we used to say at Sailthru, there is nothing worse than buying a Ferrari and never taking it out of the driveway.

For SaaS companies thinking about monetizing the PS function for the first time, here are a few considerations and tips to help you get started.

You can’t manage what you don’t measure, so start there!

Before you can even think about monetizing your PS team, you must have a strong command for where and how your team is spending their time, largely because this knowledge will help you scope projects and set pricing for them. SaaS companies with growing implementation and services functions should ultimately invest in a proper PSA ("professional services automation") solution but in the early days, even janky spreadsheets are better than nothing at all when it comes to time-tracking and project management.

A simple place to start is understanding how much of the team’s time is being spent in a customer-facing capacity. In a past life, my team called this “direct time.” I’ve heard others call it “productive time.” The nomenclature matters less than what you learn from the metric, which is usually that your resources are spending too much time on work that is not customer-facing. But worry not! As always, “sunlight is the best disinfectant,” and this exercise is more about establishing a baseline that you can work to improve. Maximizing customer-facing time should be the first step on your journey to monetizing PS.

But increasing customer-facing time isn’t enough on its own. To monetize PS, you must ultimately drive your team’s billable utilization: of all the time your team spends with customers, what portion of it is actually monetized? At an event we hosted for SaaS executives back in February, Bridget Shea, CCO at Typeface, offered the following benchmarks for billable utilization: 65% is good, 75% is better, and 85% is best. But again, the name of the game is progress over perfection; in the early innings of professionalizing your PS function, focus on continuous improvement.?

The chart below is a helpful visualization of QoQ customer-facing utilization vis-a-vis billable utilization. While the Q1 billable utilization of 15% leaves a sour taste in my mouth, this company has done a nice job driving QoQ improvements, and really closed the gap between total customer-facing and billable time in Q4.

But while utilization metrics are important inputs to managing the PS P&L, at the end of the day your customer’s success is the best proxy for your own. To that end, time to value (“TTV”) is a critically important metric for any implementation team. In last month’s Tactic Talk we advocated for defining TTV not just by the customer going live (the good ol’ “lift and shift”), but rather as the time it takes for the customer to achieve a behavior or configuration that is a “sticky driver” of longer-term net retention. We emphasized the importance of optimizing new customer implementations for the attributes that you know drive the strongest net retention, even if that means longer implementation periods. If a company is going to follow this advice, they need to ensure they can appropriately resource the PS team to make that happen, and charging for services certainly helps.

Calculate your break-even points and optimize toward them?

With time-tracking in place, companies can develop a line of sight into project-level profitability, as illustrated in this sample chart:

As the example demonstrates, bill rates vary wildly by customer. It is not uncommon that two customers could pay the exact same amount for an implementation (see Customers E and F), but yield wildly different economics based on the level of effort required for the vendor team.

If the name of the game is to break even with the PS P&L, this reporting is useless without a target in mind, so it is important for CS leaders to partner with Finance to understand the breakeven bill rate. If we assume a breakeven rate of $175/hour for this fictitious company, we see that they’ve done a nice job achieving their target on the aggregate level (which is great news and what matters most!), but if they continue to onboard a whole bunch of Customer Es, things are going to get problematic.

Use time-tracking data to inform pricing and packaging

Time-tracking data empowers CS leaders to understand the most resource-intensive part of an implementation, and those insights should instruct pricing and packaging for new customer implementations. (As an aside, I would advocate for Product and Engineering leaders to really dig into that data and understand where there may be opportunities to invest in tooling that can make the PS team more efficient and reduce friction for customers–topic for another day!)

Services pricing and packaging merits a standalone post, but an important decision for every company is whether to pursue a fixed price structure (flat fee) or a time and materials (“T&M”) approach, where you bill the customer for resources as they are consumed. Customers tend to loathe the T&M approach (remember my comment about perceived “nickel and diming?”) but it has its time and place.

Here are a few considerations as you figure out the right approach for your company:

• Use fixed price for new implementations where possible, but distinguish between a standard implementation and a custom implementation during the sales process (and charge accordingly). This can be as simple as saying to the customer, “if you meet these five criteria, you qualify for the $15,000 standard implementation, but otherwise we will do a custom statement of work based on your needs.” At Sailthru we learned–the hard way–that customers who needed to implement multiple website domains were significantly more costly to us, so one of our criteria for a standard implementation was a single-domain project. The custom project can still be offered as a fixed price to the customer, but appropriately considers (read: monetizes!) the work that will be most time-consuming.
• As a CYA strategy, vendors can put a contractual ceiling on the maximum number of hours any new implementation can consume, and reserve the right to pursue a T&M approach if that ceiling is surpassed. There is always some risk that an implementation project will go off the rails in terms of hours consumed, so it can be prudent to put in some contractual language to protect against potential downside, e.g. “the project is a fixed fee up until X hours consumed, after which point work will be billed at $Y per hour” (Editor’s note: ideally at least the aforementioned breakeven rate!). This is an “in case of emergency, break glass” clause to actually act upon, not language to take as gospel. If a customer is flagrantly misusing resources, the PS team can ensure they have measures to charge the customer for out of work scope, but this is a suboptimal situation for all parties because the PS team will then be responsible for providing detailed updates and progress reports on hourly usage both before and after the ceiling is struck.

Get comfortable making exceptions for existing customers, but be strategic about why?

We’ve largely focused on new customer implementations, but many of the lessons also apply to ad hoc services work for the existing customer base. That said, I would be remiss not to make this very important point about PS and the installed base: going back to Isabelle’s point about selling services to sell more software, there are often scenarios where it absolutely makes sense to offer PS work to existing customers free of charge. But exceptions should be true investments: they should be in clear pursuit of retaining or growing key relationships (going back to last month’s installment , this work should focus on implementing “sticky drivers” of retention).

A few thought starters on how to scope and cap free work for existing customers:

• Customer health checks. For customers who have been using the product for a while, it is important to regularly revisit how their product implementation stacks up against the rubric used for new customers today. Much of the free work we invested in my time at Sailthru was focused on free health checks for older customers; these audits regularly revealed quick wins to improve how they were set up, optimized performance, etc.?
• Invest in free work that leads to paid opportunities. The aforementioned health checks were great not only because they provided customers with some quick wins (e.g. use an updated version of an API), but also because the deliverable also included more complex optimizations that paved the way for paid engagements (e.g. re-write business logic in all email templates).
• Set a "bank" for free monthly work allowed. Sticking with my Sailthru example, our PS and CSM team leaders there did an outstanding job coordinating between their functions on this front. The CSM team had a monthly budget of free PS work that could be done for customers, and needed to be very deliberate about where to invest that time. (Spoiler alert: this was usually used in tandem with renewals playbooks/timetables!)?

Last but certainly not least, remember that you must professionalize Professional Services to earn the right to charge customers in the first place!

Customers expect to get what they pay for, so if a SaaS company is charging for implementation or other services, they must deliver! But in the world of enterprise software, it’s not just about hitting delivery dates and milestones: communication and stakeholder management are everything, and this work begins long before a deal is even signed. Best-in-class go-to-market teams weave in the proposed implementation plan and approach into all facets of the pitch and close plan.

Expectation setting and over-communication are critically important enterprise implementations, regardless of the vendor’s company stage (read: even pre-seed companies focused on design and development partners must do this well). And again, this expectation-setting should start with your pre-sales process.

Consider this artifact from my Sailthru days; this visual was a powerful piece of sales collateral for providing a straightforward summary of our five different implementation "phases" and outlining which party (our team or the customer team) was ultimately responsible for the component parts. Every enterprise sales process should have some version of this slide.

Sample Implementation Overview

It is worth noting that our PS leader at Sailthru took this work even a step further and crafted detailed "milestone letters'' to support each phase (see example for Phase 1 below) that clearly articulated not only the tasks involved, but also level of effort/hours estimates for various customer stakeholders. Customers absolutely loved this visibility!?

Sample Implementation “Milestone” Letter

Collateral aside, if customers are paying for services work, their stakeholders deserve regular updates on the project status (including project health, pacing, blockers and risks). When we coach portfolio companies on enterprise implementations, one of the first tactics we recommend is a written email update that goes to all stakeholders (from the economic buyer all the way through to the tech team) at least once per week.?

The format illustrated in the example below accomplishes a number of objectives, including:

• Providing a quick summary of overall project health and ensures that blockers are communicated in real time (no surprises)
• Clearly recapping prior mutually agreed upon commitments and outlines where teams have delivered or slipped
• Offering an easily forwardable template for recipients
• Creating a paper trail of progress week-to-week so that both the vendor and the customer have a log of progress and accountability

Sample Implementation Status Email (template here )

—

Monetizing the Professional Services function is just one of many pathways to boost business efficiency and performance. Our April edition of Tactic Talk–“Pivot to Profitable: Smart Changes You Can Make Today ”–offers several other concrete suggestions (ranging from ticket deflection to service economics)for improving SaaS margins.