S-Business Forecast: Sunny Today and Brighter Tomorrow
by James A. Alexander, Ed.D. and Mark Hordes, Partners/Alexander Consulting

The latest research* confirms what most of us in the services industry have long speculated—the future of services-driven businesses looks awesome. Here are some facts to ponder that are taken from an extensive AFSMI study that demonstrates a continuing trend of improved profitability and growth for services.

Product-Services Mix

The average of 375 responses shows that today services are close to being one-half (46 percent) of an organization’s total revenue, with products making up the remaining 54 percent. These same respondents predict that within two years services will eclipse product sales and account for 51 percent of business revenues. One can only speculate on what this landscape will look like five years out as services start to dominate the product-services mix of most companies (see Figure 1).

Profitability

Although it is widely reported in the press, and usually accepted as a fact, that gross margins are declining (especially product margins), participants in this study disagreed (Figure 2).

Respondents revealed their current average gross margin for both the services and the products sold by their organization. A later question asked them to anticipate gross margin objectives two years into the future. Figure 2 shows that participant organizations currently had a 30 percent average gross margin on services sold, compared to a 21 percent average gross margin on products sold. This difference is statistically significant. Furthermore, services were projected to be more than 50 percent more profitable than products two years into the future (again, statistically significant), increasing to a 34 percent gross margin, while product gross margin is forecast to stay basically the same (21 percent and 22 percent, respectively). This confirms many of the feelings often expressed by service executives. Furthermore, it provides a strong rationale for senior management to invest more in services—the offerings that can yield the greatest return to the organization.

Growth Rate

Figure 3 shows that participants stated that the current annual growth rate of services was double that of products (19 percent annual growth rate vs. 9 percent). Respondents also predicted that services would continue to grow significantly faster than products in the future. In addition, respondents felt that their business would be expanding with the annual nine percent growth rate for products increasing to 13 percent, while services annual growth rate would increase from 19 percent today to 23 percent tomorrow.

(Note that the respondents predicted both a significant increase from the current status to the projected future for both services gross margin and product annual growth rate.)

Confidence

Furthermore, Figure 4 shows that participants are confident in their organization’s ability to accomplish their anticipated goals two years hence. Only 10 percent stated that they were not confident in reaching those targets.

In summary, services are over 50 percent more profitable than products, with a significant improvement in the average gross margin of services expected in the near future. Furthermore, the current annual growth rate of services is more than double that of products, with a significant acceleration of the annual growth rate of services planned in two years. Overall, respondents are confident in their ability to accomplish their two-year objectives. The future looks bright for these organizations and the services leaders at their helm.

Service Executive Implications

Don’t delay; take advantage of the good news stated above by packaging it and presenting it to the people who most need to hear the story.

1. Get the word out to your people. Gather data from your organization regarding the product-services mix, profitability, and growth. Create a presentation comparing the data from the study with your figures, and use this information to start dialogues with your people. They need to know the value they bring to the corporation and the potential they have to contribute.

2. Get the word out to senior management. Take the presentation you created above and add a SWOT analysis to it. Then schedule time with the top executives to think about services strategy and its potential impact on the success of the overall business. Nothing like a little unbiased data to help move along your own services business agenda.

*Alexander, James A. 2002. The state of s-business: An international report of progress, performance, and best practices (May). AFSM International.

Jim Alexander and Mark Hordes are partners with Alexander Consulting, LLP, a management consultancy that creates and implements strategies for professional services organizations. They also are authors of the new book S-Business: Reinventing the Services Organization. Contact them at 239-283-7400, ac@alexanderconsultingsbiz.com, or visit www.alexanderconsultingsbiz.com.

S-Business: Reinventing the Services Organization
By James A. Alexander and Mark W. Hordes

S-Business: Reinventing the Services Organization offers a focused, cohesive, and comprehensive approach through which decision makers in product, professional services, and support services organizations can embrace services as a strategic weapon.

Click here, to order this extraordinary book at a 25% discount (offered to the SSPA Community).

How do you handle price increases to your support maintenance?
› View Answer