“What exactly are professional services subscriptions?” and, “How can we effectively design new offers that generate annual recurring revenue (ARR)?” These are two questions that TSIA Professional Services Research frequently addresses.

Professional services subscriptions are not just a new model, but a compelling opportunity for many organizations. Generating recurring/renewable revenue enhances the company's overall valuation, opening doors to potential growth and success. These services shift focus from product or engagement success to the longer-term goal of customer success, promising a more sustainable and customer-centric business model.

Various innovations in cloud computing and mobile devices fuel subscription-based products, which is the main reason behind spiking interest in professional services to move to a subscription model. Companies like Adobe, Microsoft, and Salesforce have successfully transitioned portions of their PS offer portfolio to a subscription model, demonstrating its potential for success. As more companies take the initial steps to create subscription service offers, it’s become an increasingly popular topic.

Economic turbulence will lead some to slow down, while others will use the opportunity to release new professional services subscription offers. With the intensifying interest, there needs to be more clarity about what precisely professional services subscriptions are.

This blog will review professional services subscriptions and what moving to professional services subscriptions can do for your business. 

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What are Professional Services Subscriptions?

Unlike traditional, transactional, project-based services, professional services subscriptions are designed to be renewed. They focus more on customer needs and outcomes rather than product functionality.

Subscription services must be considered renewable with a recurring revenue model paid for upfront; this revenue is then recognized over months or years. Subscription/renewable services routinely have a flexible consumption model leveraging credits, tokens, or vouchers.

They typically have contract terms and conditions, including language such as, “use it or lose it” within a specific timeframe. Any unused service entitlements or currency, such as credits or vouchers, expire at the end of the term. This encourages customers to consume services before the end of the term. Still, it also poses a risk of non-renewal if the customer feels they haven't fully utilized their entitlements.

In the subscription model, customer success is paramount. If a subscription service is not renewed, it is essentially a transaction. Thus, renewing the subscription becomes a new priority for professional services delivery teams. Project and customer success managers must focus more on long-term customer success, ensuring that the customer's needs and outcomes are always at the forefront.

Understanding the Types of Professional Services Subscriptions 

With input from our members across TSIA practices, the following taxonomy should help establish a standard industry definition for subscription services.

• Transactional services are traditional professional services with a natural life cycle, a defined scope of work, and a defined end or completion date. They are project-based services.
• Contractual services are engagements with a termination date, but no well-defined scope or defined deliverables. They have a termination date and require a renewal event. Put differently, they are “good” until the end of the term. Technical account manager (TAM) engagements or resident engineers are typical examples of contractual services.
• Subscription services are ongoing agreements with no end date or term. Subscription services are “good” until canceled.
• Renewable services typically refer to either contractual or subscription services. The main driving force behind renewable services is recognizing the revenue as annual recurring revenue (ARR), rather than typical services revenue.

Customer interest in renewable services must be considered. Over the years, many offers have been developed that do not land with the customer. Customer interest and company funding to transform the organization in support of renewable offers are foundational when designing professional services subscription offers.

Before Getting Started with Professional Services Subscriptions 

Recurring services revenue involves many changes across the organization. It requires the organization to come together and approach the overall customer engagement differently, with more focus on the customer’s desired outcome instead of the company’s desired outcome.

Continuous incremental value is at the heart of renewable offer(s). Transforming the organization to focus on customer value over the traditional feature function of technology has been underway for years. It’s been a slow journey, but one that reassures executives about the focus on customer satisfaction. The organizational change needed to pivot sales, delivery, and operational motions to customer value, is routinely underestimated. It can be a heavy lift for many, but the result is worth it.

There are warning signs to consider. Rolling out an offer without the operational processes in place will lead to friction points, delays, or even complete failure of the offer set. Cross-functional planning will be the winning play.

Moving to a renewable professional services subscription model is not a solitary journey. It requires a collaborative approach, where salespeople, customer success managers, and project managers must unite on the customer value journey. The change involves aligning all customer-facing resources on the overall charter to drive long-term customer success and increase renewal rates.

Related: Considerations for Moving to Professional Services Subscription Offers

Making a Move to a Professional Services Subscription Model

More companies are taking a component approach when selling new subscription offers. These components are funded through flexible currency, such as credits, vouchers, or blocks of hours paid for as part of the subscription.

These components become part of the subscription entitlement. In many cases, the customer can self-serve from the services catalog. The focus of ratable revenue recognition for services may be a new concept for some companies, further complicating flexible consumption and subscription rollout.

Operationally, this shift requires new customer consumption analytics. If the model is “use it or lose it,” losing the entitlement due to lack of consumption puts real pressure on the likelihood that the customer will renew.

Consumption dashboards are also needed to provide information on customers who are maximizing the use of their subscriptions, making them good candidates for upsell opportunities.

Moving to subscription services can expect some operational efficiency. The need for deal reviews and “statement of work” reviews can be notably reduced or eliminated. Flexible consumption models (such as credits or vouchers) involve a single procurement process with the customer, allowing them to apply as desired.

This approach streamlines the procurement process, reducing the timeline for achieving the desired outcomes.

Related: The Journey to a Professional Services Subscription Model

Seven Steps to Creating a Professional Services Subscription

There are seven basic steps to getting started on creating your offer:

1. Assemble a cross-functional team consisting of core stakeholders.
2. Conduct a broad survey among your customers to determine their interest and desires in professional services subscription offers.
3. Assess your existing professional services portfolio for low-hanging fruit. For example, pivoting from resident engineering or TAM offers to contractual offers could be relatively easy.
4. Determine how the offer will be paid for—for example, in advance with entitlements to follow, or more of a utility payment method that pays based on consumption.
5. Determine the critical parameters of the offer. Reflect on “use it or lose it” and possible escalation situations.
6. Decide what kind of currency the consumption model should use. This could be credits, tokens, vouchers, prepaid points, or hours to track entitlement use. Guard against considering these as a universal currency. Instead, use a specific list of services that can be purchased using this currency.
7. Include more characteristics of value-based pricing as opposed to traditional cost-plus pricing.

Related: Emerging Trends in Professional Services Pricing

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Common Challenges and Questions

There are a few common challenges organizations will experience when shifting to a professional services subscription model.

Integration

Integration is paramount to establishing a holistic view of the customer experience, from the initial contact to ensuring lifetime value and a delighted customer along the way. The golden thread of customer identification needs to be connected across the following systems:

• Customer relationship management (CRM)
• Configure price quote (CPQ)
• ECMS
• Professional services automation (PSA)
• Pricing and finance tools
• Customer success tools
• Staffing and scheduling

Dashboards for consumption analytics, win/loss, and renewal/churn also become higher priorities.

Scope Management

During the professional services subscription delivery, the entire delivery team needs to know the scope of work and the boundaries. Clear guidelines on when something exceeds the defined scope‚—which, could in-turn, impact how the revenue is recognized—need to be well defined. 

Risk and scope management are priorities in transactional services and have become even higher priorities for subscription services. One common challenge when recognizing revenue for a professional services subscription, is the need for project managers to fully understand the scope of work and keep the delivery motion within it. 

Allowing for variation can lead to failing financial audits. For this reason, it is very important to educate project managers on the ratable revenue recognition rules and their long-term impacts.

Cross-Functional Collaboration

To help complete the cycle, customer success managers and project managers must collaborate on where the customer is in the consumption and value journey. Clearly-defined responsibilities in the form of responsible, accountable, consulted, and informed (RACI) charts are a must. Outlining when the customer success manager and project manager should be involved leads to crucial cost savings.

The Future of Professional Services Subscriptions

Based on a recent, real-time poll, more than 50% of companies responded that they were “curious,” or taking initial steps toward a subscription model for professional services. An increasing number are having some initial success or are piloting offers. Very few have a mature PS subscription offer portfolio. We have seen a slight increase in the median revenue from subscription services over the past six months.

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Most professional services organizations will develop renewable offers and continue to deliver traditional transactional offers. This hybrid model will be around for many years to come. Only some will move over exclusively to renewable services. 

Further out, there will be a need for two new offices:

• The value management office will develop specific and structured customer value propositions spanning the current functional areas of professional services, customer success, and managed services.
• The resource management office will assume a new centralized role as extreme organizational convergence occurs across service lines. Resources will be selected based on their skills, proficiency, availability, and interest in delivering work that could be considered professional services, customer success, or managed services.

You should enter the professional services subscription model with the clear understanding that it’s unique. It requires a different approach across the various internal workflows and customer-facing interactions. 

Moving to a subscription model will require a new—or, for some—renewed focus on customer value/“first.” The move also puts new requirements on tracking and trending consumption of the professional services subscription entitlements.

Your Key Takeaways

• Prioritize customer value: Transitioning to a professional services subscription model requires a shift from focusing on product functionality to emphasizing long-term customer success. Ensuring that your offerings are designed to meet customer needs and drive outcomes will be crucial for sustaining renewals and growing recurring revenue.
• Cross-functional collaboration is essential: Successfully moving to a subscription model involves aligning sales, delivery, and customer success teams around a unified approach to customer engagement. Cross-functional planning and clear role definitions are crucial to avoiding operational pitfalls and ensuring a smooth transition.‍
• Operational readiness is critical: Before launching subscription offers, ensure your organization has the necessary operational processes and analytics. Properly tracking customer consumption and value realization is essential for driving renewals and identifying upsell opportunities, making it a fundamental part of the subscription model’s success.