For all of their many benefits, professional services firms can be challenging companies to run.
We've worked with hundreds of great companies and effective leaders who all share the same challenge: growing their business is directly tied to the time, effort, and expertise of their team.
It’s a linear equation: to increase revenue you have to increase your team. Cost, complexity, and volatility grow.
In order to break through this ceiling, you need a way to unlink the value you deliver to your customers from the time and effort you must put in to deliver it. You need a way to truly scale, not just grow.
This is what productization does.
Productization is becoming table stakes in professional services
Productization takes the process and expertise that creates the value of a strong professional services company and creates a scalable (and typically digital) product that can be sold and used over and over again in a way that augments, differentiates or replaces existing services. Digital products are the most scalable type of productization, and AI-enabled digital products are the most promising, valuable, and differentiated platforms being launched today.
According to McKinsey research, 9 out of 10 businesses–including professional services companies–are embedding digital technology in their current business model, launching new digital business models, or both. The top economic performers are investing more aggressively than the average firm to differentiate or transform themselves with digital products.
The B2B subscription market will reached over $340 billion in 2024, and is growing at 24% year over year. While this market size includes dominant players, there is a massive opportunity for niche digital products that reflect the expertise and capability of specialized professional services companies.
AI is changing the game
There has been a lot of focus in the last year on AI as accelerators for professional services firms. AI is remarkably good at rapidly creating project plans, summaries, presentations, and more, saving time and–with good oversight–often improving quality. But every firm is gaining the advantage of faster work using AI, and an advantage for all is an advantage for no one.
The game-changing nature of AI is in the ways it is changing how services are delivered, and changing value propositions themselves.
Imagine this: If you're a strategy, management, or project-based consultancy, what if in two years you could offer your clients a project approach or recommendation enabled by AI-driven insights from hundreds of similar projects or circumstances? And what if you could provide smaller clients you can't serve today with a subscription-based platform or hybrid service that could do the same?
If you're a talent company, that if you could offer assessments and insights based on thousands of candidates and outcomes?
Repeat for whatever flavor of expertise and service you provide, from training to advisory, financial to legal, and more.
Or imagine this: what if your competitor is making that pitch to your clients instead?
Today’s innovation is tomorrow’s table stakes, when firms with AI-enabled platforms will be able to offer differentiated services, creating a competitive advantage that will be very difficult for others to match.
The business case for AI & digital products in professional services
All digital products, and especially AI-enabled digital products, allow a professional services company to unlink revenue from time and effort, enabling scale. But there are several other potential benefits when considering a productization strategy.
Create Recurring Revenue
Most services businesses move from project to project with little reliable recurring revenue. A digital product can provide stability and predictability, unhooking revenue from linear time and effort either as a stand-alone product or as a subscription embedded within existing services.
Increase Profitability
A healthy digital product company has gross margins of 75-80% or more, compared to 50% or less for services companies. Product design & development does have higher upfront costs, so leaders must understand the path to ROI and revenue of an investment in a digital product.
Differentiation
An AI-enabled digital product can create differentiation and synergies alongside your current offerings, helping professional services companies win new business compared to competitors and remain sticky with existing clients over time. This is profoundly true with AI, as the technology is moving very quickly, and companies who move now to combine client and project data with their own expertise in a uniquely trained platform will unlock forms of differentiation that do not exist today.
Unlock New Customers
Most firms only serve a small percentage of potential customers. Digital products & AI allow a professional services company to serve smaller customers profitably and expand their potential market.
Increase Company Valuation
The valuation multiplier for a subscription-based business is much higher than a services company, and that valuation is less dependent on a founder’s or leader’s presence in the business at exit. Over the last 8 years, when digital product companies have been sold, they have sold for five to nine times their annual revenue, compared to one times annual revenue for the average professional services company. The emergence of AI-enabled digital products within professional services firms will only increase this difference.
Common productization strategies for professional services
There is more than one way to be successful in introducing digital products into a services firm. A single firm can pursue multiple strategies, or evolve from one strategy to another over time.
- Automation: Use a bespoke digital platform to gain efficiencies in your existing service.
- Differentiation: Create a digital product as a visible and highly differentiated component of your existing service.
- Diversification: Sell a digital product directly for recurring revenue, linked or unlinked from your existing service.
- Transformation: Become a digital product company and fully exit existing services.
Niche AI-enabled digital products are the future of expertise
As AI begins to reshape how professional services firms deliver services and differentiate from each other, AI is also accelerating the design and development of software and digital products, lowering the up-front investment to build and launch AI-enabled platforms that would have previously been out of reach for mid-market firms.
This means companies will be able to afford investment in their own platforms for competitive advantage, instead of only being able to subscribe to massive platforms like Salesforce or OpenAI for generally available AI and automation tools.
As a result, we'll likely see an explosion of niche, AI-enabled digital products from professional services firms across all sectors. The first-mover advantage is right now.
Examples of successful productization
To learn more, read about how some of Highland’s clients have successfully pursued productization to differentiate or transform their businesses.
- Creative Group launched an incentive platform to gain differentiation in the $1B corporate incentive market.
- Genioo created a new kind of project management platform to unlock a $100M ARR opportunity.
- A financial services firm diversified into a digital commerce platform with more than $3B in transactions to date.
- Archer Career transformed a personalized career coaching service into a scalable career prep platform with over 20,000 users.
If you’d like to discuss digital product strategies and hear how Highland helps our clients create recurring revenue and scale, we’d love to hear from you.
