Take a glance at the most valuable businesses, and you’ll spot a commonality: recurring revenue. Apple Inc. is a prime example. The company skyrocketed to a $3 trillion market cap as it transitioned from product sales to recurring subscription-based services.
Given the undeniable allure of recurring revenue, it might be a surprise that, as a service business leader, focusing solely on recurring revenue can lead you down the wrong path.
I’ll dive into why a blend of project-based and recurring services might be the secret ingredient for your business’s success.
By combining project-based and recurring services, you can grow your business, improve profitability, and develop better relationships with your clients and customers.
As I’ll explain, this combination allows you to do three things:
- Increase revenue without insourcing risk
- Solve Valuable Service Problems (VSPs)
- Get paid for sales and marketing
Read on if you want to grow your business, improve client and customer satisfaction, enhance profitability and de-risk your business.
Increase Revenue without Insourcing Risk
Insourcing risk is when your clients or customers can replace your services with their own employees. You see insourcing risk when customers or clients decide that it’s cheaper or more convenient to do services themselves instead of outsourcing them.
I witnessed insourcing risk a few years ago when I spoke with Sam (not their real name), the CEO of a business providing property management services for multi-family residential buildings.
Sam’s business struggled to achieve profitability and, despite growing, was losing some of its best customers.
When I asked Sam about competitors, their response surprised me: “We have no competitors,” Sam said. I pointed out many property management businesses in the area, so Sam elaborated. “Our business model is apples and oranges with those businesses you mentioned. We serve owners with fewer units – less than 20. Other property managers can’t and won’t serve them.”
Sam was right – they didn’t have competitors in the traditional sense. But Sam missed a crucial piece of the puzzle. Their biggest competitors weren’t other property management companies; they were the customers themselves! Many of them started managing their properties or hiring full-time employees as soon as they could afford it, making Sam’s services obsolete. This pattern highlighted the insourcing risk in Sam’s business.
In Sam’s case, attempts to increase profitability through price hikes inadvertently pushed customers towards insourcing, a trap many service businesses fall into.
This experience underscores the importance of understanding and mitigating insourcing risk, particularly when building a service model reliant on recurring services.
What do project-based services have to do with reducing insourcing risk?
Unlike recurring services, project-based services tackle low-frequency jobs, which are much more likely to be outsourced. Who wants to hire a full-time employee to do something that happens just a few times a year?
Brent Beshore categorizes private equity shared services into four categories based on how frequently they’re needed and how valuable they are.
- High Value, Low Frequency (HVLF): Highly skilled and rarely needed.
- High Value, High Frequency (HVHF): Highly skilled and often needed.
- Low Value, Low Frequency (LVLF): Less skilled and rarely needed.
- Low Value, High Frequency (LVLF): Less skilled and often needed.
Beshore points out that the real magic often happens in HVLF services.
HVLF services require rare and valuable skills and are crucial to get right, but companies tend not to hire full-time employees to do them. While Beshore refers to private equity shared services, the same is true for services in general.
This insight into insourcing risk and categorizing services by value and frequency leads to an important realization: To mitigate insourcing risk, incorporate HVLF project-based services into your business model.
But there’s more to project-based services than just risk mitigation. Another compelling reason to embrace them lies in the opportunity for addressing what I call Valuable Service Problems (VSPs). In the following section, I’ll explore how overlooking project-based services can lead to missed opportunities in solving VSPs. This oversight can significantly impact your service offerings, relationships, and role as an essential partner.
Why do regulatory and governance functions have lower insourcing risk?
Certain services – like hedge fund administration or health and safety monitoring – have low insourcing risk with high frequency. That’s because regulatory or governance factors prevent businesses from doing it themselves. Additionally, some service-based businesses achieve scale economies, enabling them to provide recurring services at a lower cost than any single client or customer could do on their own. However, most of these businesses should still provide complementary project-based services, as regulatory environments can evolve and advancements in technology impact the cost structures of many services.
Solve Valuable Service Problems (VSPs)
Imagine you’re having lunch with your biggest customer or client, and they start venting to you about something making their life harder than it should be. They’re not blaming you; they’re confiding in you. As you listen, you realize you and your team have the expertise and experience to solve this problem.
Sounds like an opportunity, doesn’t it?
Your customer or client just described what I call a Valuable Service Problem (VSP). VSPs are the intersection of pain points, the market your business serves, and your practitioners’ expertise.
By addressing VSPs, you become a trusted partner to customers and clients, improving retention and pricing power.
You want to work on these types of problems. But if your company provides only recurring services, you’re probably ignoring VSPs or trying to solve them with the wrong services.
Imagine an IT Service Business, GammaTech Solutions, that specializes in cybersecurity. The Chief Information Officer of their largest client, Trigger Advisory Group (TAG), calls GammaTech’s CEO to ask about a potential service offering. TAG’s new Board of Directors is worried about potential business disruptions arising from cybersecurity attacks. They want TAG to have a full cybersecurity audit to detect gaps in their current systems, providing the Board assurance that the management team is doing everything possible to mitigate this risk. As a top priority for the Board, the company has allocated $1 million to this initiative and asked the CIO to allocate the funding. The CIO wants to know if GammaTech can help them.
This cybersecurity audit is an HVLF job. TAG may do cybersecurity audits in the future, but it’s unlikely they’ll be of the same scope and scale.
Suppose GammaTech only provides recurring services, like ongoing cybersecurity monitoring. They’d have just two choices: Turn down the business or try to sell TAG a recurring service that doesn’t meet their needs. But if GammaTech provides a mix of recurring and project-based services, then there’s a good chance they are prepared to capture this valuable business opportunity.
This dynamic applies to all service businesses. Clients and customers constantly run into challenges that need project-based solutions, with a clear start and end. Addressing these challenges with only recurring services misses the mark entirely.
Working on VSPs sets you apart as a versatile and responsive service provider. It also helps you understand needs more profoundly and showcase your knowledge and passion for the industry. Clients and customers will continue to use your services not only for the existing offerings but also for the potential to derive increasing value over time from working with you, similar to how software businesses roll out new features and publish their roadmaps.
To summarize, project-based services are a strategic necessity because they reduce insourcing risk and address many Valuable Service Problems, fueling revenue growth, enhancing profitability, and forging more resilient relationships with clients and customers.
But project-based services have another compelling advantage: they can create a desirable scenario where your marketing efforts directly contribute to your revenue stream. In the following section, I’ll delve into how using project-based services can turn your sales and marketing activities into profitable ventures.
💡 Tip: If you encounter a VSP you don’t know how to resolve, consider collaborating with a couple trusted clients or customers before scaling it across the business. Approach it like software companies launch features in beta before rolling them out across their core product.
Get Paid for Your Sales and Marketing
In the previous section, a fictional IT Service Business, GammaTech Solutions, is approached by its largest client to provide a cyber-security audit. Let’s say, recognizing the market opportunity, GammaTech’s leadership develops a new project-based service called a Cyber Risk Assessment, a version of the project for TAG.
After a few months, the GammaTech team receives more inbound requests from customers who weren’t previously interested in a cybersecurity audit. To the leadership team’s surprise, most requests are for the new Cyber Risk Assessment offering.
But should they be surprised?
The barriers for a client or customer to sign up for a project-based service are generally lower than for a recurring service. With a defined beginning and end, project-based services require less of a commitment and provide a more precise value proposition. The barriers preventing these prospects from becoming clients have been removed.
What happens next, though, illustrates one of the powers of project-based services.
After completing the Cyber Risk Assessment, these new clients often sign up for GammaTech’s recurring services. Completing the assessment showed them all the cybersecurity gaps they needed to fill and rectify. Having successfully delivered on the project-based mandate, GammaTech is the natural choice to do the ongoing monitoring for them.
Again, this dynamic exists for all service businesses, not just IT. Project-based services can provide your business with a foot in the door with clients and customers who would otherwise be reluctant to sign up for a long-term recurring service offering.
Project-based services can be a form of marketing for your recurring service. But, better than typical marketing, you get paid to do it.
A great example is from one of the most successful service businesses of all time, CGI Inc., depicted here:
Many service businesses already perform free services as part of the sales process. A discovery call is a service that helps the prospect develop a deeper understanding of their needs and objectives. It’s the same with presenting and objection handling, which often require advising clients or customers to help them see blind spots they may be missing. Some companies go as far as recommending everything from strategy to tactics before a service agreement is signed.
Rather than providing free services, you can charge for project-based services like discovery or diagnostic services to showcase your business’ expertise. A tangible deliverable allows you to differentiate yourself from your competition and demonstrate to clients and customers that they can depend on you for future recurring services. By converting free services into paid project-based services, you can increase your revenue and profitability while ensuring prospects receive high-quality work.
As these services are strategic, you can structure their pricing to be attractive to your best prospects. For example, you can price the services close to cost or offer credit towards recurring services, incentivizing conversion to long-term engagements.
Final Thoughts: Crafting a Balance of Service Offerings
Whether you’re considering Apple Inc.’s recurring revenue or the fictional GammaTech’s development into a service titan, the key to enduring success isn’t about choosing between project-based or recurring services. It’s about strategically combining them.
Today, despite the emphasis on recurring subscription revenue, Apple still leans into product revenue. CEO Tim Cook articulated it best when he said:
“The kinds of things we love to work on are those where there’s a requirement for hardware, software, and services to come together. Magic occurs at that intersection.”
In service businesses, a similar magic happens at the intersection of recurring and project-based services.
At this intersection, service businesses mitigate insourcing risk while maintaining long-term relationships with clients and customers. It’s where service businesses can work on VSPs, positioning themselves as a versatile and responsive problem-solver capable of addressing specific, high-impact issues that transcend the limitations of recurring models. And it’s where they can convert costly marketing into paid services, simultaneously increasing short-term revenue and contributing to long-term recurring revenue.
The most successful service businesses, like CGI Inc., recognize and leverage a combination of project-based and recurring services. This balanced approach allows for flexibility in addressing diverse needs, reduces dependency on a single revenue model, and opens up new avenues for growth and profitability.
As you navigate the complexities of your service business, remember that the blend of the two might be the secret ingredient for your lasting success.